Capital Structure
The Capital Structure of Chinese Companies
1. Introduction
Capital structure is considered as a way to determine how a corporation financing its assets by issuing debt or equity. If the firm is entirely financed by the common equity, then it is so called an unlevered firmed, and its whole cash flow belong to its stockholders. If the firm financed both debt and equity, then it is so called a levered firm, and its cash flow will first goes to debt holders and then to stockholders. According to Brealey et al (2010), the total value of a firm is the sum of its debt value and equity value. Nowadays, Chinese listed companies are playing a really important role in the global economy. While the researches on the capital structures of Chinese listed companies are much less than that on western developed firms. In order to have a whole picture of the capital structure in Chinese listed companies, this essay will first briefly introduce some relative theories. For instance, the Modigliani-Miller theorem without and with taxation, trade-off theory and pecking order theory. Also some previous empirical evidences will be given. Secondly, this essay will move to discuss the situation in Chinese listed companies. In this part, it will first list the special characteristics of Chinese listed companies. And then discuss the capital structure of Chinese listed companies by analyzing some related determinants, like profitability, tangibility, non-debt tax shield, size, volubility and ownership structure. In addition, to make the essay more reliable, it will contain two empirical studies’ results, which focus on Chinese listed companies. Finally, this essay will give a brief conclusion to all these findings.
2. Theories
2.1 Modigliani-Miller Theorem without tax (1958)
The modern thinking on capital structure was first started from the Modigliani-Miller theorem (1958) under the assumption of no taxes. In this theorem, it also contains a lot of strict pre-conditions, for
1. Introduction
Capital structure is considered as a way to determine how a corporation financing its assets by issuing debt or equity. If the firm is entirely financed by the common equity, then it is so called an unlevered firmed, and its whole cash flow belong to its stockholders. If the firm financed both debt and equity, then it is so called a levered firm, and its cash flow will first goes to debt holders and then to stockholders. According to Brealey et al (2010), the total value of a firm is the sum of its debt value and equity value. Nowadays, Chinese listed companies are playing a really important role in the global economy. While the researches on the capital structures of Chinese listed companies are much less than that on western developed firms. In order to have a whole picture of the capital structure in Chinese listed companies, this essay will first briefly introduce some relative theories. For instance, the Modigliani-Miller theorem without and with taxation, trade-off theory and pecking order theory. Also some previous empirical evidences will be given. Secondly, this essay will move to discuss the situation in Chinese listed companies. In this part, it will first list the special characteristics of Chinese listed companies. And then discuss the capital structure of Chinese listed companies by analyzing some related determinants, like profitability, tangibility, non-debt tax shield, size, volubility and ownership structure. In addition, to make the essay more reliable, it will contain two empirical studies’ results, which focus on Chinese listed companies. Finally, this essay will give a brief conclusion to all these findings.
2. Theories
2.1 Modigliani-Miller Theorem without tax (1958)
The modern thinking on capital structure was first started from the Modigliani-Miller theorem (1958) under the assumption of no taxes. In this theorem, it also contains a lot of strict pre-conditions, for
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