Research on the Capital Structure of Chinese Listed Companies

Author: Zhu Ye
Publisher:
Publish Date: 2003-05-01
Features: I began to systematically engage with capital structure theory around autumn 1988. However, at that time, China had not yet implemented modern enterprise system reforms, so I always felt that the theory and practice of capital structure were quite distant from China. In 1995, both academia and industry in China started to pay attention to capital structure, primarily because they sought a way to address the high leverage of state-owned enterprises (SOEs). However, this research on capital structure based on high-leverage SOEs gradually encountered a tricky issue: whether SOEs truly had the subject (research eligibility) for capital structure studies. The confusion in academia and industry regarding the subject of capital structure research sparked my interest. Through years of observation of China's corporate investment and financing practices and capital markets, I found that only listed companies capable of multi-channel financing and investment in capital markets possess the subject for capital structure research.
As my observations deepened, in 1999, some economic behaviors that played a decisive role in the capital structure formation of Chinese enterprises gradually entered my field of vision. For example, Chinese listed companies showed an excessive preference for equity financing; the relatively small bond market and long-term credit market could not provide listed companies with sufficient debt capital. It can be said that the special financing sequence of equity financing before debt financing, characteristic of Chinese listed companies, contributed to their relatively low debt-to-asset ratio and lower long-term debt ratio. The status of capital structure theory, as well as the content and uniqueness of Chinese corporate capital structure, inspired me to pursue research.
Capital structure is a significant research area in finance, with the MM theory regarded as one of the foundational theories that pioneered modern finance. China's research in this field started relatively late, in the early 1990s, and has been plagued by several misconceptions. First, the definition of the subject of capital structure research is not clear, and research based on SOEs has gradually caused confusion in academia and industry. Second, the content and methods of research are arbitrary and outdated, with most studies differing from mainstream Western research. Third, the conclusions of the research are often simplistic logical judgments, insufficient as a basis for listed companies and their stakeholders to change or adjust their economic behaviors. For these reasons, this book attempts to make some breakthroughs in the following aspects.
First, redefine the subject of capital structure research. Taking the subject of capital structure research as the starting point, I argue that capital structure is dynamic, but the capital structure of SOEs is stable. Therefore, only listed companies capable of multi-channel financing in capital markets and with flexible investment should be considered the subjects of capital structure research. It is explicitly proposed that listed companies should be the subjects of capital structure research in China. Second, attempts in research content and methods. In terms of content, since the relationship between capital structure and capital cost (or enterprise value) and the factors influencing capital structure constitute the main content of modern and new capital structure theories, these should also be the main content of capital structure research for Chinese listed companies. These studies have practical guiding significance for the financing decisions and capital structure determination of listed companies. However, I also believe that the main components of capital cost for Chinese listed companies have significant uniqueness. Characteristics such as lower equity financing costs than debt financing costs, insignificant bankruptcy costs and agency costs, make us retain some skepticism while acknowledging modern and new capital structure theories. That is, we cannot simply use Western capital structure theories to describe the capital structure of Chinese listed companies. In terms of methods, cross-sectional and time-series studies have been widely used in capital structure research. This book attempts to use 2000 as the research window, employing cross-sectional methods to find that the capital structure of Chinese listed companies is negatively correlated with capital cost but positively correlated with enterprise value. The significance of these two conclusions lies not only in verifying the relationship between financial leverage and weighted average capital cost of listed companies, as well as the relationship between enterprise size and weighted average capital cost, but also in providing many valuable insights and behavioral guidance for listed companies and related stakeholders.
Last, based on empirical results and logical reasoning, draw inferences. First, combining with the evolution of China's financing system, logical judgments are made on the capital structure of listed companies, leading to several inferences. One is that the current single function of the securities market is an inevitable result of the historical evolution of China's corporate financing methods, and the current state of the securities market determines the financing behavior of listed companies, as well as the connotation of their capital structure. Second, the evolution of China's financing methods is related to the institutional arrangements corresponding to Chinese enterprises in different historical stages, with different dominant financing methods guiding corporate financing behavior. Third, capital cost plays a significant role in determining financing methods and capital structure. Second, through the two conclusions of the empirical research, the capital structure of listed companies is analyzed from multiple perspectives, providing references for listed companies and their stakeholders to change or adjust their economic behaviors.
During the writing process of this book, I received guidance from Professor Jiang Bokuo, whose encouragement gave me the courage to turn some of my ideas into the small volume presented today. The formation of this book also benefited from the help of many others. Professors Ma Zhimo, Hu Qingkang, Liu Hongzhong, Xu Shaoqiang, Chen Xuebin, Gan Xindi, Huang Zemin, Gong Haocheng, Lian Ping, Hong Jaguan, and Li Xindan provided valuable suggestions in terms of framework, research methods, content arrangement, and research conclusions. I am deeply grateful for this. At the same time, I would like to thank the leadership of my department for their support, especially Professor Liu Hongzhong, who provided great support in terms of life and time. I would also like to thank Zhang Yong and Fan Wenzhong, who are studying at Yale University in the United States, as well as Li Yonghai and Nong Shuzhen, a couple studying in the U.S., for their great help in finding foreign literature. Wang Zhijun and others provided support in organizing some of the original materials. I am grateful to them all.
My wife took on almost all household chores and her daughter's education. Whenever I think of this, I always feel a sense of apology. Therefore, I dedicate this book to them.
During the publication process of this book, I received strong support from Zhang Yuhong and Xu Huiping of Fudan University Press. I am deeply grateful to them.