StudyoftheCapita_省略_ineseEnterprises_Yue

Study of the Capital Structure and Firm Value of Chinese Enterprises

Yue Feng

Mudanjiang Normal University, Mudanjiang, Heilongjiang, China 157000

Keywords: Chinese enterprises, Capital structure, Enterprise value

Abstract. The capital structure optimization problem has long been plagued in the academia worldwide. This paper explores the Leland capital structure theory model based on the reasonable range suitable for China's corporate capital structure optimization. Firstly, from the MM model and the amendments to the MM model manpower, it is based on the basic model of the enterprise value to reflect the capital structure and financial risk. Capital structure and earnings - liabilities ratio of China's state-owned enterprises, empirical analysis, research the actual liabilities ability of state-owned enterprises in China. Finally, around the sustainable development of enterprises and based on the introduction of Leland to explore suitable national conditions, and the corresponding export under certain conditions to be a more reasonable debt ratio range.

1. Introduction

Throughout the Western capital structure theory, the following view: net income (NI) theory, the theory of net operating income (NOI) and Modigliani - Miller (MM) theory. Net income (NI) theory is that changes in the capital structure lead to changes in the cost of capital; the value of the company along with movements and increases with the rise of the debt ratio, net operating income (NOI) theory that changes in the capital structure of the value of the company is not impacted. The MM theory introduces arbitrage (description of the concept of both the market value of the difference), if the two companies just capital structure there is a difference, then the value of the two companies could not. If the value of the two companies, the investors will sell company shares overvalued and buying undervalued shares of the Company, until the value of the two companies. MM theory is based on the assumption of no tax and bankruptcy possibility, consider these two factors, MM theory admits a certain degree of financial leverage will lead to a decline in the cost of equity capital and the increase in the value of the company. When the debt continues to increase, the bankruptcy increased possibility as well as the reduction of the tax benefits will result in higher cost of equity capital and the decline in the value of the company. Based on the above research results, it combined with the actual situation of China's listed companies, we analyze the enterprise value of the capital structure DE, enterprise value will cause changes in the capital structure how the changes.

2. Study on the Relationship Between Enterprise Value and Capital Structure

Consider the enterprise value from two aspects: First, it is based on the market value of the liabilities and equity-based enterprises to obtain the present value of future cash flows. From the former capital structure through a direct impact on the cost of capital, the impact of discounted future net cash flows discounted rate, thereby affecting its value. This shows that the capital structure is one of the most important factors affect enterprise value. While the realization of the enterprise value and capital structure designed vest behavior; goal-oriented design of the 1275-049-1/10/$25.00 ©2013 IERI ERMI 2012 capital structure, as determined by targeting the formation to adapt the capital structure of design patterns.

Foreign theoretical and empirical research on capital structure and corporate value relationship is more abundant. According to the history of its development, the conclusions about capital structure and corporate value relationship can be summarized as follows: First, the design of the capital structure is a specific form of enterprise value and to optimize financing decisions and capital structure management is to increase the value of the company an important way. Enterprise reasonable arrangements for the capital structure, the one hand, can take advantage of the liabilities of the tax avoidance effect, reduce the cost of capital, improve capital utilization efficiency, on the other hand can optimize the company's governance structure, reduce the potential between the company internal stakeholders will cause conflicts of interest costs, improve the basis of value creation achieved. In addition, Ross' signal transmission theory that the enterprise manager financing options actually passed to investors signal investors to stock issued as a corporate asset quality deterioration signal, debt financing is asset quality the signal, so the enterprise value of the asset-liability ratio is related to the higher of the more high-quality corporate debt ratio. Debt to enterprise value has a positive relationship, and to play an active role in the enterprise. Second, the capital structure is not the case of the higher debt ratio is the better it is. Future cash flow is less than the expected value of the possibility of the company's financial risk increases with the debt ratio in the capital structure gradually increase, increase debt, which could produce the bankruptcy costs, the value of the company is less than no level of debt financing. Third, there is an optimal capital structure. Liabilities arising, the marginal risk marginal benefit balance, enterprise value reaches a maximum when the capital structure is optimal capital structure. Visible, the capital structure of the decision problem is an optimization problem that in certain financial risks and creditors constraints to maximize shareholder wealth. Choice of capital structure is influenced by various factors: different industries, different enterprises and even the same company in different periods of its optimal capital structure may be different.

3. Factors Affecting Capital Structure

In general, the basic factors that affect the corporate capital structure position: the stability of the business growth and sales; industry conditions and the structure of corporate assets; solvency and cash flow; profitability; business condition and financial management preferences; corporate financial environment; attitude of lenders and credit rating agencies; the level of the cost of capital; tax deductible, tax saving factors; leverage. According to the degree of influence the formation of the specific circumstances of the listed companies in China as well as factors on capital structure, we summarize the factors that affect the capital structure of listed companies in China: First, it is the volatility of corporate earnings. Business operating profit to measure the volatility of corporate earnings, but the operating profit of the large-scale enterprises is relatively large, so that does not reflect the real income volatility. Therefore, we use the ratio of operating profit and total assets of the enterprise to measure the volatility of corporate earnings. Second, it is the collateral value of assets. It needs to consider the maturity enterprises in debt financing, the ability to repay liabilities, and thus need to measure the value of the assets of enterprises to repay debt, the greater the part of the asset, the stronger its debt due for repayment ability. So, we use the sum of net fixed assets and inventory net than the year-end total assets of the enterprise to represent corporate collateral value of assets, there is a positive correlation between the values of the capital structure. Third, it is the firm size. We measure with the total assets of the natural logarithm of enterprise scale. The larger the scale, the project operated on a more decentralized, and thus unable to repay maturing debt and bankruptcy less likely, so that there is a positive correlation between firm size and capital structure. Fourth, it is the profitability of the business. Net profit and finance costs and average total assets ratio to measure the profitability of the business. According to the theory of optimal financing order, the companies will give priority to the endogenous financial. The higher the possibility of highly

profitable enterprise source financing, so that a negative relationship between capital structure and corporate profitability. Fifth, it is the non-debt tax shield. According to the MM theorem, the main benefits of corporate debt capital are the interest on the tax deductibility of the role in the effectiveness of the tax shield. The benefits of the tax shield are valid only when corporate profits greater than 0. The presence of other non-interest tax shield (such as depreciation) will weaken the motivation of enterprises using the leverage capital. Therefore, we extracted annually of Depreciation average assets ratio as a measure of non-debt tax shield, the negative correlation between the non-debt tax shields and capital structure. The analysis of all the elements above, the following conclusions can be drawn: positive correlation between enterprise scale and collateral value of assets and capital structure, leading to the capital structure to change in a positive direction; volatility of corporate earnings, corporate earnings and non-debt tax negative correlation between the shield and the capital structure, the capital structure to change in a negative direction. So from the enterprise value factors, the optimal capital structure should exist, when the positive changes and negative changes cancel each other out, is the capital structure to achieve the optimum time, is to maximize enterprise value.

4. The Capital Structure of the Enterprise Value

The enterprise value is the market value of all of the assets of the enterprise, the enterprise value is different from the profit, just part of the new value-creating enterprise value includes not only the new value created, and also contains the potential or expected profitability. To define the enterprise value of the ratio of market value and replacement cost, the use of cross-sectional analysis to verify the relationship between capital structure and corporate value. Difficult to obtain due to the replacement cost of the listed companies in China, in the calculations, we use the end of the year, the total assets of the listed companies to replace the company's market value is equal to the product of the total number of shares and at the end of the arithmetic average of the closing price (P) of the company at the end of. That is: Y = (V + B-A) / A, where Y represents the enterprise value of the listed company, V = P * N, N indicates the end of the total number of shares of listed companies, be listed companies at the end of the book value of liabilities, A Represents the book value of the total assets of the listed companies. Using this formula, you can eliminate the factors of firm size, so that the value of comparable among enterprises. Long-term debt ratio of China's listed companies based on the frequency distribution characteristics of long-term debt ratio of listed companies in China 2004 is divided into seven sections. Has a linear relationship is assumed that the capital structure of listed companies in each interval segment and enterprise value. K represents the capital structure of each change in a unit causes the enterprise value of the change in the number of units that the capital structure of the enterprise value of the marginal contribution, X represents the change in value of the capital structure, Y represents the change in value of the enterprise value. Then K = Y / X, X approaches zero, K can be approximated by a straight line slope. Therefore, we can analyze the changes in the slope of the line to the capital structure of the enterprise value of the marginal contribution. Accordingly, we have established the model: Y = a + bx, where Y represents the enterprise value, X represents a capital structure (long-term liabilities ratio), a said intercept, represents straight slope. Through research b changes can reflect the changes in the capital structure of the enterprise value of the marginal contribution K. According to the data, in the listed company's long-term liabilities from 5% increments to 35% of the process, the capital structure of the enterprise value of the marginal contribution decreasing from 52.71 to 2.47. When long-term debt ratio increased to more than 35% of the diminishing marginal contribution is negative, the enterprise value with the increase in the rate of long-term liabilities decreased and reduces the amplitude increasing. Marginal contribution is zero,

long-term debt ratio range of 30% to 35%, and the enterprise value of the maximum optimal capital structure. We can find b decreases with the increase in the rate of long-term assets and liabilities, it means that K decreases with the increase in the rate of long-term assets and liabilities, showed the law of diminishing marginal contribution of the capital structure of the enterprise value. With the increasing ratio of long-term liabilities, the diminishing marginal contributes to zero, the enterprise value of the maximum, corresponding to the best capital structure. If the long-term debt ratio continues to increase, diminishing marginal contribution is negative enterprise value decreases.

5. Conclusion

For the reduction in equity value, there are two cases: one is to take the initiative to reduce the enterprise for the rights and liabilities of the pursuit of a certain proportion of the capital structure of the target, while the increase in liabilities corresponding reduction in equity quantity. This happens mainly when the equity value of the relative proportion of large. In order to adjust the capital structure, it quickly reaches the target structure and takes more radical measures. The more common form of passive reduced. Greatly increased corporate debt, maintain the original value of equity capital unchanged pursuit liabilities operation to change the capital structure of the effect, on the one hand, the objective an operating loss, on the other hand, as the debt burden has been increasing, making the equity value reduced. The debt burden of long-term serious overload, the consequences will be serious. There are two direct consequences here, one is the erosion of the enterprise's own equity capital, and another is the transfer of the debt burden. Corporate heavy debt burden, the ongoing erosion of principal and interest on equity capital will be in the case of long-term losses, liabilities, the corporate set aside profits and capital surplus will gradually deplete, once the net carrying amount of the equity capital is zero, corresponding corporate assets is 100% of the debt structure. The capital structure optimization problem has long been plagued academia worldwide problem, explore Leland capital structure theory model based on a reasonable range suitable for China's corporate capital structure optimization. Of course, our study remains to be further, solving for the value of the assets, for the determination of the value of the enterprise settled, as well as asset-liability ratio and risk the exact relationship between the expressions of all further work needs to be done.

6. Acknowledgement

This research was financially supported by the innovative pre-research project of the Mudanjiang Normal University---Allocation of financial resources and analysis of economic and social development in Musui, and the doctoral research start-up projects by Mudanjiang Normal University---Study on the convertible bond financing game equilibrium.

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