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Debt Financing Governance Effect Analysis of Listed Companies in China

Author: WeiZhi From: www.yourpaper.net Posted: 2009-05-05 20:54:02 Read:
[Abstract] According to the theory of agency theory, signal theory, transaction cost theory analysis, know that the use of debt financing can play a role reduce agency costs and improve corporate value. Empirical results with theoretical expectations of debt financing, governance of listed companies in China are not consistent. Finally analysts believe that the Debt Financing Governance Effect of institutional factors and the company's own factors, and provides a theoretical basis for future debt financing research.
[Keywords]
the debt financing soft budget constraint assets quality

Accompanied by the emergence of the modern company, the owners and managers have the right to operate the separation of the ownership of its main features. Economics assumption that people are selfish, resulting in a principal-agent problem between owners and managers, managers operate to meet their own interests. However, the owners want managers to maximize the interests of shareholders rather than managers maximize their own interests. How to effectively solve the problem of the agent, in order to maximize shareholder - to maximize enterprise value is the focus of current research. Debt financing can play a role in reducing agency costs to some extent, gradually attracted the attention of scholars. Debt financing in this article from the point of view of its governance effect.
Debt financing governance theory analysis
MM theory put forward, so that the capital structure of the research are gaining ground in the Western developed countries, many scholars economic theory: property rights theory, transaction cost theory, signal theory and agency theory introducing financial studies, to promote the development of financial theory. Below each debt financing governance theory analysis:
The trade-off theory: trade-offs due to the liabilities tax revenue and liabilities bankruptcy, debt agency costs lead to enterprise value as the debt ratio increases first increased and then decreased, showing the inverted U-shaped.
Signal theory is that: on the assumption that income distribution and investment opportunities, manager or internal than external people have more internal information to choose from capital structure can pass information to outside investors in order to attract external investment, higher liabilities ratio to distinguish between high and low enterprise quality signal. The study suggests that the higher the liabilities, the higher the value of enterprise. Harris (1990) from debt restructuring and liquidation angle analysis the signal effect of the debt, the researchers assume that managers do not want to exit the company's control and to provide information to the external liabilities and the ability to repay the company's quality information passed to outside investors. .
Agency theory: liabilities can ease the perspective of principal-agent problem (Jensen and Meckling, 1986), that when companies hold more free cash, making managers abusing their freedom cash, however, if the company has more liabilities due to expire restrictions on the payment of principal and interest, managers can reduce agency costs, thereby enhancing enterprise value.
Product market theory: debt more carefully to the control of the company to provide raw materials for the company's corporate transactions. If the transaction fails, the debtor will bear most of the cost of failure; And if the transaction is successful, the debtor also can not get additional benefits (Sarig, 1988). The debt makes control of the company in negotiations with suppliers, efforts to reduce the possibility of failure, thereby increasing the value of the company.
The theory is that of control of the company: General Manager of the company to become a takeover target will increase the debt and the value of the company will rise.
As can be seen from the above analysis, from the perspective of agency theory, signal theory and information asymmetry theory, control theory, etc., debt financing can play to alleviate the agency costs, and motivate managers, the quality of the company passed to outside investors and improve the role of enterprise value (Jensen & Meckling, 1976,1986); Ross (1977; Williamson, 1988).
Two, empirical analysis of the effects of debt financing governance
With the rise of the development of the capital structure theory and empirical research, more and more domestic and international empirical literature on debt financing governance, the following will be representative of the literature analysis.
1 Financing Governance Effect of foreign debt-speed empirical literature
The earliest research abroad principal-agent theory of Jensen and Meckling (1976), presented from the perspective of agency cost of debt governance effect. Harris and Raviv (1988,1990) to explore a different role in the governance of the debt financing. Analysis of the relationship between debt financing, mergers and control of the contention between 1988 and found that the company's financial leverage, will bring a different way of mergers and acquisitions, for example, the high level of debt the company with the possibility of leveraged buyouts larger, lower debt level of the company, the price of the acquisition of the possibility, in the middle of the two debt level of control of the company by the proxy contest decided. 1990 Harris and Raviv through modeling theory analysis of the role of capital structure and debt information, the theoretical basis for the debt to investors pass on company information as well as investors use this information to supervision and manager behavior. The study found that debt financing is a good monitoring tool, especially when the company is in default, the creditor is entitled to select the liquidation of the company or to continue to operate and deliver useful information to investors.
Stulz (1990) analyzed the relationship of debt financing and business contraction and company liquidation. The study found that, due to the inconsistency of interests between managers and shareholders, leading managers to consider whether the company's business contraction and liquidation exit their own interests, so should withdraw business contraction and liquidation, but did not make the appropriate decision-making, and ultimately the shareholders' interests by loss. This phenomenon is likely to occur in the case of company funds from the equity financing, debt financing companies face the pressure of debt service and litigation, the possibility of managers to take the right decisions.
The above analysis can be seen in the debt financing of the foreign companies in developed countries can indeed play a role alleviate agency costs, increase corporate value, consistent with theoretical expectations.

2. Domestic debt financing Governance Effect empirical literature
The domestic representative literature are as follows:
Wang Hui (2003) from 1998 to 2000 sample theoretical analysis and empirical tests, the study found that the overall debt financing to strengthen corporate governance, increase the role of the enterprise value of debt finance, corporate governance and company market value of the relationship, but for assets The debt ratio is too high (greater than 60%), the debt treatment had no significant effect. Companies to issue bonds with a positive market reaction, debt financing has played a signal role in transfer performance of the company.
The in East Sense (2003) think that the the to close logical links between the company claims the role of governance and corporate performance, the unique characteristics of the different institutional factors and enterprise as the interpretation of the initial conditions of the debt governance utility. Using the 1998 to 2001 samples on the capital structure, of creditor governance and company performance relationship theoretical analysis and empirical test, the study found that the asset-liability ratio and the results of a negative correlation between the invalidity of that debt governance. And It by Ye Zongwei (2004) uses the 1998 to 2002 samples analyzed governance effect of debt financing, the study found that the performance of the company and corporate debt financing rate was a significant positive correlation between support for the conclusions of Wang Hui (2003). But at the same time found that the proportion of debt financing of the enterprise value to improve the magnitude of the effect is not significant.
Jin-Ming Zhang (2005) using the empirical data of listed companies in China from 2001 to 2003, carried out to test the relationship between the proportion of debt financing and corporate performance indicators, and come to the conclusion of the debt poor governance effect. This conclusion seems to Finance and the Western mainstream analysis does not match the effects of debt governance. By summarizing know produce results inconsistent reasons: First, the equity financing preference and convenience makes debt financing can not restrict managers abuse cash flow; soft constraints is the lack of independence of the commercial banks and claims; bankruptcy exit mechanism and camera governance the failure of the mechanism.
Tian Lihui (2005) study found that in the State-owned shares of listed companies, along with the increase of the scale of bank loans, the manager of public consumption and the upward trend in free cash, business efficiency and the gradual decline in value of the company; while in private capital-led listed companies, the above corporate liabilities and manager corruption collaborative relationship is not significant. The failure of debt governance of listed companies in China mainly because state-owned the double property rights, government owned commercial banks to issue corporate loans and corporate loans to banks, can not expect both to be able to monitor each debt governance is bound to fail.
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