6

The determinants of capital structure1

Introduction

The idea that the general characteristics of a firm's capital structure can affect its performance has been receiving increasing attention from the financial profession. Modigliani and Miller's (MM) classic 1958 paper demonstrated that the value of a firm with given cash flows was not affected by its debt-equity ratio, in a perfect market where there are no friction costs, bankruptcy costs, and taxes. However, extensions to their analysis, incorporating variables such as taxes, bankruptcy costs, and agency costs indicate that the mix of financial claims affects the value of the firm because changes in the mix change the firm's total cash flows. With the increasing interest in corporate governance issues, the link between corporate governance and capital structure has been attracting considerable theoretical attention. 2

This chapter investigates the determinants of capital structure in Chinese firms, and will contribute to our understanding of the corporate governance mechanism in China. Although there have been many studies of capital structure for developed and developing countries alike, this is the first such study for China. Furthermore, this study combines insights from various strands of finance theory, notably agency theory, signalling theory, and the theory of corporate control to establish a more comprehensive model of the determinants of capital structure.

This study will also contribute to the increasing number of empirical studies from around the world, and fills a gap in the case of Chinese listed companies. The prevailing view, as expressed by authors such as Mayer (1990) and Rajan and Zingales (1995), and as commented upon by Booth et al. (2001), seems to be that financial decisions in developing countries are made somewhat differently from that predicted by the standard theories derived from developed economies. Booth et al. (2001) carried out a detailed study of ten developing countries, and showed that the determinants of capital structure are largely consistent with those in developed countries. This study will test the stylised facts we have learned from both developed and developing economies, and add new evidence on the determinants of capital structure in transitional economies such as China in which factors such as the taxation, accounting, banking, and governance systems are rather different from the countries already studied.

The structure of the chapter is as follows. In the next section, we outline the theory of capital structure, beginning with the classic MM paper and then discussing

-105-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Corporate Governance in China
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen
/ 175

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.