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China's large debt financing conflict

Author: Zhang Zuo From: www.yourpaper.net Posted: 2009-04-01 01:06:16 Read:
Abstract most of our corporate balance rate has been high, its gearing ratio is much higher than the level of their foreign counterparts, due to the conflict with the solution of corporate debt financing in China's major debt financing bank loans, to achieve the maximization of market efficiency.
Keywords contract theory of corporate debt financing debt-equity swap

1 Summary
Corporate debt financing and capital structure theory, Modigliani & Miller in their pioneering study, the enterprise is defined as aggregates composed of a number of investment projects and the revenue generated. Claim as one of the sources of funds will be in accordance with the particular mode to get a certain amount of cash flow. However, they did not consider why the company's managers are willing to pay the cash flows to investors, on this basis, Jensen & Meckling proposed, in fact, the internal managers tend to use a variety of means the proceeds for its own rather than paid to the investors. Therefore, the debt covenants defined as giving creditors the cash flow has a residual claim agreement.
Later commissioned the development of agency theory, the study of the company's capital structure has injected new vitality, Smith & Warner, in order to protect the interests of investors, the borrower shall also undertake the series does not violate the terms of the lease, If the debt the company is in default, the creditor will get control of the debt collateral, or request the rights to the company's liquidation bankruptcy, then claims the most essential feature is the breach of debt covenants due to borrowers triggered some control over the direction by debt the transfer of the creditors. Which, they focus on the conflict between the interests of the creditors and shareholders from the four main aspects: First, the dividend policy. If shareholders gains dividends, at the same time will weaken the company's ability to invest in the future, is to reduce the income of the creditors; debt dilution problem. If the new priority debt financing for the owner has been issuing debt, his claims have been subjected to weakened; asset replacement problem. Company managers always prefer high risk (sometimes even negative) net present value of the project to get higher returns, he may creditors under the low-risk financing contract payments will be used for other purposes higher risk investment purposes, increase the likelihood of making creditors suffer a loss; Fourth, the problem of inadequate investment. Myers pointed out, if the enterprise is to accept the benefits of a positive net present value of the project by the creditors, it may reject a project.
Corporate finance theory holds that early financing enterprise content is exogenously determined, it showed the form of a standard contract, companies can choose is the scale of financing. This is clearly inconsistent with the facts, later the securities proposed design theory is the contract itself terms as endogenous variables studied, mainly in two aspects: First, the investment of cash income stream allocated between shareholders and creditors; Second, enterprises the right to control the remaining property transferred under what conditions is the incentive optimal. Townsend and Diamond analyzed from different angles bankruptcy liquidation mechanism. Debt restructuring talks Mechanism (renegotiation), is the creditor an interest guarantee mechanism, the theoretical explanation given by Baldwin & Mason et al.
The status quo of China's large corporate debt financing
Currently, most of the majority of our Company's asset-liability ratio high, relatively low debt ratio of listed companies, which they attributed in part to more than a means of financing: equity financing, IPO initial public offering, the listed companies use stock financing costs considerably lower than other modes of financing (in this issue, China has many scholars have conducted more in-depth studies); Nevertheless, relative to the mature financial markets in the same industry view our listing The company's debt ratio is still high. Subjective point of view, as larger companies are generally capital adequacy, flexible financing options, and if the project investment fails, you can also with the creditors debt renegotiation, as in recent years, state-owned enterprises in order to non-performing assets using debt conversion, shortening debt maturity limit dividend payouts rather than let the company is liquidated immediately. The high debt ratio will bring some negative effects, the risk of its operations for the company, too high a debt ratio increases, ultimately may be the path of bankruptcy and liquidation; financial system for banks and other money lenders too much will lead to more bad debts, which will lead to the bank in the ever-changing financial markets become fragile, will greatly reduce the ability to combat the crisis.
Usually the company's debt, not only by the borrower to the bank, but also may be due to the related party transactions of the company's largest shareholder and the formation of this case, especially in China's listed companies are common, and a huge amount of complex formation between related parties debt.
The 3 corporate debt financing Game
Our discussion here are assuming incomplete contract, incomplete contract is the personal bounded rationality, the complexity of the external environment, uncertainty and incomplete, as well as the presence of the transaction costs of the contract period, third-party arbiter of the parties to the contract or the contract could not be confirmed or observed everything, so that the contract can not be all might happen are being reflected in the contract, the resulting contract incompleteness. Because the information is not complete, so the creditors unpredictable what might happen to the signed contract, and there after the shareholders' opportunism may also eroded the interests of the creditors. The following specific model to discuss.
Visits game between the Company and the Bank to consider debt financing for bank loans, because in our country, a lot of companies to issue bonds and not the preceding paragraph of many examples, the credit is too low, with the sound of some developed countries debt and equity market compared to China's stock market is relatively very prosperity, and the bond issue was essentially zero, which reflects not only the listed companies is not reasonable to use financial leverage, but also can be seen after the listing of the company, and there is no effective regulatory restraint mechanisms.
Banks as creditors, with the residual rights of control of the company, that the debt the company is insolvent or strategies of default, the bank can exercise residual control rights to liquidate the company, it is also because of the presence of residual control and clearing mechanisms, bank and the company concluded the contract is guaranteed. Incomplete contract, however, due to asymmetric information and incomplete information, the effectiveness of the implementation of the terms of the lease will reduce and eventually led to the partial failure of the clearing mechanism.
Assume that the entire contract includes four important point in time, denoted as t = 0, 1, 2, 3, and assume that the company and the banks are risk-neutral. Assuming that the company has an investment project, but its capital is insufficient to bear the entire investment, so it needs external financing, according to the pecking order theory, the company will give priority to debt financing, the entire contract process is shown in Figure 1.
In the case of incomplete contract, the maturity of the debt, the Bank does not fully grasp the company's investment in real earnings P, it can only return information passed by the shareholders of the Company, in reality, this information is often one of the true value noise Pn, obviously P> Pn, shareholders took advantage of this noise to obtain personal gain. Assume that the bank wants to minimize information asymmetry, it is necessary to pay a certain cost Ci, and there are certain liquidation costs Cl, and located on the reputation of the company for breach of contract losses for G, if the company debt transferred shares stripped of non-performing assets as a obviously a
3.1 normal profits with the banks Game
Assumed normal earnings, if the company's earnings P less than current debt repayments F, the presence of information asymmetry allows the company to select the following three strategies: compliance, strategic defaults and malicious breach. Strategy of default is the Company's shareholders use the bank information collection costs and liquidation costs deliberately only pay part of the debt principal and interest, but the extent of its breach of contract is lower than the upper limit of the bank implementation liquidation, in accordance with the above assumptions, the shareholders to find a strategy breach of contract, is F Pn (F-Ci-Cl); malicious breach of contract is that the company refused to pay part or all of the debt, causing a bank liquidation behavior (see Figure 2).


Here only assume for the moment bank D 'of the dividend, wherein D' (F-Ci-Cl). As a large company, because of the reputation effect, a rational shareholders will try to make the company a long time to stay in business, and therefore, unless the project fails, he will not arbitrarily malicious breach the banks to reduce the extent of their own credit. So in the hypothetical future game, the strategy of the company is reduced to two: compliance and strategies for breach of contract, at the same time, the bank's strategy to accept and not accept. Can be drawn between the company and the bank repayment game payoff matrix (see Figure 3). See from Figure 3, in a policy breach, regardless of the bank to accept it or not, the company's pay will be less than F, due to the repayment game, well-informed shareholders of the Company has a first-mover advantage, so in practice, (strategy default, accept) is a viable company optimal, combination Bank suboptimal.
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