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Study on Effect of Debt Financing on Corporate Performance in Chinese Listed Companies

Author: LiMei
Tutor: ZhangLiShang
School: Southwestern University of Finance and Economics
Course: Accounting
Keywords: Chinese listed companies debt financing corporate performance
CLC: F275
Type: Master's thesis
Year: 2010
Downloads: 452
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Abstract

●Background and purposeSince the 20th century,90 years, corporate governance is playing an increasingly important role in improving corporate performance and enhancing overall competitiveness of enterprises while the financial structure and corporate governance are closely linked. With the convergence of the financial structure theory and the corporate governance theory, foreign scholars have generally agreed that debt financing plays a very important role in improving corporate performance through theoretical and empirical studies. Debt financing can reduce agency costs significantly and improve the efficiency of corporate governance and improve corporate performance through incentive and constraint mechanism, signal transduction mechanism and the allocation and shift mechanisms of control.However, there is the irrational phenomenon of the deterioration of corporate governance effect of debt financing in Chinese listed companies, and the current theory and practice of China generally does not attach importance to impact on improving corporate performance of debt financing. Both quantity and quality of existing research are far behind the foreign. Therefore, debt financing study about its impact of improving corporate performance is very important. In this sense, the thesis on the impact study of debt financing on corporate performance of Chinese listed companies has important theoretical and practical significance:it will not only enrich the current theoretical research related to debt financing, but also have important practical significance on regulating the practice of corporate finance behavior, improving the company’s economic efficiency, optimizing the construction of Chinese financial markets, as well as perfecting the socialist market economic system. ●Main contents and conclusionOverall, the thesis based on previous studies, regarding the actual situation of listed companies in China as a starting point, considering the impact of debt financing on corporate performance of Chinese listed companies as the research object, using the research methods of combining theoretical analysis with empirical analysis and a certain knowledge of mathematical statistics, studies the correlation between debt financing and the performance of the selected listed companies systematically. First, the thesis reviews the relevant research literature at home and abroad and summarizes the relevant theoretical basis. Then, it explores the impact of different types of debt financing on corporate performance for the specific situation of our country from the perspective of empirical analysis and draws conclusions. At last, the thesis analyses the reasons for the status quo of the impact of debt financing on the companies’performance and makes appropriate improvements. Details are as follows:Firstly, the thesis reviews the domestic and foreign relevant research literature about the impact of debt financing on improving corporate performance. The research abroad in similar studies has an early start which theoretical research and empirical studies have achieved fruitful results. Compared with overseas studies, the research of our country about relationship between debt financing and corporate performance is still in the preliminary stage of development. There is not only a lack of depth, but also a very limited number in existing research.Secondly, the thesis introduces the related theoretical basis of the governance of debt financing based on defining the related concepts of the companies’ performance and debt financing, including cost theory, control theory, stakeholder theory, asymmetric information theory, signaling theory and the Pecking Order Theory. The thesis specifically describes the theories and the main points of their representatives. These theories constitute the theoretical basis of the study of the impact of debt financing on corporate performance.Thirdly, the thesis analyses three aspects of the impact of debt financing on corporate performance from the theoretical point of view systematically: constraints and control on the shareholders, incentives and constraints on the managers, and managerial effect of different sources of debt. Theoretical analysis concludes that debt financing has a positive effect to improving corporate performance.Fourthly, before the empirical analysis, the thesis first carries on descriptive statistical analysis on the sample data of three years from the 2006-2008 of A-share listed companies in China. The study concludes:①at present, the region of Chinese debt financing of listed companies is still relatively low in general, which is related with our company’s listing requirements and the underdeveloped corporate bond market;②the maturity structure of debt is short and current liabilities are the main form of debt financing of listed companies, which is because the management and control of Chinese banks to the enterprises’ long-term credit are increasingly tight while the conditions for short-term loans are more relaxed;③bank borrowing is still the main source of debt financing of Chinese listed companies at the present stage, which is also related with the Chinese underdeveloped bond market.Fifthly, on the basis of the previous theoretical analysis and descriptive statistical analysis, using the sample data of three years from the 2006-2008 of A-share listed companies in China, from three points of the overall level of debt, debt maturity structure and debt source structure, the thesis puts forward four hypothesis, and accordingly establishes four multivariate linear models, and conducts a multiple regression empirical analysis. The study concludes:from 2006 to 2008, the ratio of assets and liabilities and corporate governance indicators ROA of Chinese listed companies have a significant negative correlation; short-term debt ratio and ROA show a significant positive correlation; in contrast, there is a significant negative correlation between the long-term debt ratio and ROA; bank loan ratio and ROA have a significant negative correlation, and only the conclusion does not meet the assumption, while the previous conclusions are all in line with assumptions. This shows the deterioration of the impact of debt financing on improving corporate performance of listed companies. The higher the overall level of debt, and the more the long-term debt or bank borrowing, the role of debt financing on enhancing corporate performance is lower. Relative to the long-term debt financing, short-term debt financing is more able to promote a higher level of performance of listed companies.Sixthly, for the empirical test results, the thesis analyses the reasons for the deterioration of governance effect of debt financing from internal and external environment of Chinese listed companies. Among them, the internal environmental factors include that listed companies in China prefer equity financing, the largest shareholders of listed companies are mostly the state-owned shares in the state of "virtual ownership", the stakes proportion of managers of listed companies are relatively low and the selection mechanism of managers is not perfect etc. The external environmental factors include the development of corporate bond market lags behind, development of securities markets is not balanced, listed companies and banks have a certain "homology", company delisting and bankruptcy mechanism is not perfect, appropriate governance mechanism on the corporate has not been established for creditors (mainly referring to banks in China),the laws and systems related with corporate bond market are lacking and the host of the banking system is invalid and so on.Finally, for the reasons for the deterioration of governance effect of debt financing on Chinese listed companies, the thesis presents corresponding measures to improve the impact of debt financing on corporate performance of Chinese listed companies, including:optimizing the internal governance structure, implementing the reform of the banking system, improving the bank-enterprise relations and our existing host banking system, enhancing the professional level of credit risk management, improving relevant legal systems and mechanisms for information disclosure of listed companies, strengthening the bond market building and regulating the corporate credit rating system.Main research contribution and deficienciesIn short, the thesis draws on some experiences of previous studies in the research process of theoretical analysis and empirical testing, such as the choice of indicators of corporate performance and debt financing, etc. At the same time, the thesis also has innovation in research methods. First, the thesis carries on systematic and comprehensive analysis of the impact of debt financing on corporate performance from three points of the overall level of debt, debt maturity structure and debt source structure to make the studies more detailed and more systematic. Secondly, the thesis has collected the latest data in three years from 2006 to 2008 of listed companies in Chinese Shanghai and Shenzhen stock market for empirical research, in order to not only find the latest trends, but also maintain research continuity. Thirdly, the thesis does not propose hypothesis directly under western literature theory, but adjusts western conclusions according to Chinese actual situation, and then puts forward the hypothesis in line with Chinese actual situation.Of course, there are still some shortcomings in the thesis because of the limitations of my academic knowledge. The main drawback is the thesis does not take the impact of industry factors and the annual factors on corporate performance into account in the empirical research process which may affect the accuracy of the findings. These shortcomings need to be improved and enhanced in my future study and research.

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