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The Mechanism Study of Capital Structure and the Overcapacity

Author: TangZuoChu
Tutor: TangYaoJia
School: Zhejiang University of Finance
Course: Western Economics
Keywords: capital structure overcapacity overinvestment regional government
CLC: F275
Type: Master's thesis
Year: 2011
Downloads: 140
Quote: 0
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Abstract


The economic development of China has been plagued by overcapacity in recent years, especially since the financial crisis, the problem of overcapacity is more prominent and once again become the focus of policy departments. China has long been including market access, project approval, directory guide, land approval, administrative approval of the loan, mandatory clean-up and other means to control repetitive construction and excessive competition, overcapacity. But the effect is not good, overcapacity problem has not been fundamentally resolved. And for the cause of formation of the overcapacity, scholars mainly from the demand, the policies, market research, etc, but fundamentally on capital structure characteristics were studied. Capital structure not only embodies enterprise capital from different sources, also affect the enterprise power in every stakeholder relations, the benefits of constraint and incentive intensity, so that determines the enterprise’s investment behavior. Therefore, this article tries to explain the differences between enterprise capital structure, over-investment enterprises and the formation mechanism of long-term overcapacity.The capital structure and the enterprise’s investment behavior in the literature, the conflicts of interest between managers and shareholders make managers have the tendency to over-investment, that is the focus of the scholars to study, and debt financing can play the role to inhibit the excessive investment of managers. However, this study found that, due to overproduction of industry has its market structure and system structure of the specific characteristics, so formed the particularity of capital structure of the enterprises. The reason is that in the fierce competitive environment, companies with high debt have the strategic commitment effect in response competition, and state-owned shares as the absolute subject of the ownership structure, but the state-owned shares of property rights out of position led to the shareholders and managers between the agency costs increase. Because of the distortion of investment incentives for business, managers have universal impulse to expansion of investment in high-debt capital structure, with enterprise exist more serious over-investment behavior, and as the assessment of economic indicators and political promotion needs, the regional government has incentives to supply lower price of land ,financial resources and various preferential policies to support enterprise’s over-investment , so that debt financing is even more difficult to play a role in governance, and eventually lead to overcapacity crisis. To prove this point of view, this paper established the mathematical model on the proof of the logical relationship between capital structure and over-investment incentives; and used the free cash flow and the agency cost model from the ownership structure and the debt financing governance role for empirical test. Test results showed from the description that listed companies are state-controlled iron and steel enterprises as the mainstay, the gearing ratio of listed companies were generally high; the test results from panel data analysis that listed companies in the steel industry generally have over-investment behavior, and debt financing is difficult to achieve effective governance role. Further analysis found that, compared to the non-local-controlled and private enterprises, the local state-controlled have more serious over-investment behavior, and debt financing is more difficult to inhibit the over-investment behavior, and thus verify the paper’s viewpoint. Finally, according to the theoretical analysis and empirical test results, put forward to from three aspects to governance overcapacity. Firstly we should improve corporate governance mechanism and improve the efficiency of investment enterprises. Secondly reform government officials and promotion mechanism examinational and realize the transformation of the role of the local government. Finally deep the reform of state-owned enterprises and establish the market environment of fair competition.

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CLC: > Economic > Economic planning and management > Enterprise economy > Corporate Financial Management
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