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The revelation of the development of capital structure theory to Chinese enterprise financing decision

Author(s): Dun Li, Xiangqian Zhang

As capital structure is one of the core issues of corporate financial policy, Capital Structure Theory (CST) has also become one of the core issues of corporate financial policy. With the constant efforts of economists since 1950, the theory’s research depth and research scope has made great development and even exploited to a broader field especially after the introduction of agency cost theory, information asymmetry theory, etc. since 1970. First of all, the article reviewed the development process of modern CST. It analyzed four reasons of China’s financing difficulties which were the fuzziness of definition of state-owned capital property right, the insufficiency of effective mechanism of incentive and constraint, the influence of the long-term low depreciation rate policy, and the hysteresis of institutional investors development due to the underdevelopment of capital market. Then the article brought up four suggestions those are focusing on debt financing preference, relaxing rate control for a floating interest rate, developing capital market to promote direct financing, and adjusting financing structure to adapt to enterprise development. Finally, it arrived at a conclusion that China’s enterprise would gradually prefer debt financing rather than equity financing as the increasing liberalization of capital market in China and financing behavior would also conform to the modern CST.

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