EffectsofcorporategovernanceoncapitalstructurechoiceofChineselistedfirms.docx
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1、Waikato Management SchoolCorporate FinanceZUCC-joint International ProgrammeEffects of corporate governance on capital structure choice of Chinese listed firmsEnglish full Name & Student ID: Gloria Chen 31205611Pie Shan 31205614Breathe Yang 31205590 Charis Ying 31205592Judy Yi 31205591 Doris Wang 31
2、205627Assignment: Introduction and Literature review Date Submitted23rd March Official Use OnlyLateTime:Plagiarised Special circumstancesWord Count 2452 Effects of corporate governance on capital structure choice of Chinese listed firmsIntroductionCorporate governance is a collective issue suggestin
3、g “organize, manage, lead and control the overall operation in a company for sustainable development and growth” (Masnoon & Rauf, 2013). Specifically, effective corporate governance is significantly essential for a company to construct its capital structure for investment purpose and acquire conside
4、rable returns for its shareholders. Moreover, several attributes of corporate governance, including board size, outside directors, ownership concentration, managerial ownership, director remuneration and CEO duality, influence companys ability in attracting capital and reducing debt cost a lot.A gre
5、at number of researchers examined the relationship between corporate governance and capital structure in their own countries. However, the empirical research about the impact of corporate governance on the capital structure choice of Chinese listed companies is rare. As a result, it is critical to e
6、xamine how the corporate governance influences the choice of capital structure in China. This paper examines the relationship between various variables of corporate governance and the capital structure of Chinese listed firms during 2005 to 2014. The remainder of the paper is organized as follows: t
7、he next section provides brief backgrounds of corporate governance and capital structure in China and an overview literature on the subject matter. The following section discusses data, variables and methodology. Then, the paper presents the research results and discussion. Finally, the last section
8、 draws a conclusion.Overview of literature The literature on international trend of corporate governance has gone through an explosive growth in the past decades (Li, Xu, Niu&Qiu, 2012). As the strongest developing country, which has experienced typical emerging economy, China is transforming from a
9、dministrative governance to economic governance in aspect of corporate governance (Li, Xu, Niu&Qiu, 2012). Regarding to corporate governance of listed firms im China, from the moment that equity markets established in 1990, the Chinese state council and the China Sexurities Regulatory Commission (CS
10、RC) have concentrate a lot in advancing the corporate governance of listed firms (Yang, Chi and Young, 2011). For the reason that there have been lots of fraud cases related to capital structure. For example, New York Stock Exchange-listed Longtop Financial (LFT), which is a financial software compa
11、ny having multi-billion dollar market capitalization, however, was accused by American short seller of inflating its margin through hiding operating costs (Jackson, 2011). The accuse hit the company severely, and meanwhile put great pressure on Chinese corporations as well. Therefore, for the purpos
12、e of regulate the market, several laws and codes relating to corporate governance have been established (Yang, Chi and Young, 2011). For instance, the non-tradable share reform introduced in 2005 has impacted listed firms corporate value and performance positively. However, because of Chinese compli
13、cated environment, governance instruments which are efficient in developed countries do not work equally well in China. Therefore, Sheikh and Wang (2012) further state that to reduce the rate of fraud, it is inevitably to enhance accountability and efficiency. Apart from that, since corporate govern
14、ance is bounded with corporate capital structure as well, optimize the capital structure is another choice. In China, as Wang (2003) demonstrates, corporations are more likely to have lower leverage level compared to other countries. Take real estate companies for example, because of the undeveloped
15、 corporate bond market and the ownership structure, they tend to have lower long-term debt ratio and higher equity over fixed assets ratio. Consequently, it is significant to the company whether managers act in the common interest with stockholders. Aspects that play essential role and are needed to
16、 be researched including board size, outside directors, qualification of directors, CEO duality, functions of board of directors, and financial reporting framework.Measures of corporate governance and their relation to capital structureA number of empirical studies have illustrated that board size,
17、outside directors, ownership concentration, managerial ownership, managerial compensation and CEO duality will have influence on corporate governance. Moreover, a specific discussion of these attributes and their relation to capital structure is clarified below.Board size The board of a corporate pl
18、ays vital roles in decision-making process. The board determines the overall strategy and policy involving various aspects of corporate governance. Specifically, one of the most essential issues is the construction of capital structure. Moreover, the relationship between board size and capital finan
19、cing has raised much attention. According to Wen et al. (2002) and Abor (2007), the financial leverage (capital structure) is positively related with board size, suggesting that larger board tends to pursue higher leverage for higher company valve. Additionally, they also claimed that the difficulty
20、 in arriving agreement resulted from lager board size can weaken corporate governance, which leads to high leverage. Similarly, Anderson et al. (2004), Kyereboah-Coleman and Biekpe (2006) have shown a positive association between board and debt ratio. Specifically, Anderson has shown a negative rela
21、tionship between board size and cost of debt financing, suggesting that companies benefit from larger boards with pool of expertise and resources, which promotes them to adopt high debt policy. However, according to Lorca, Sanchez-Ballesta & Garcia-Meca (2011), there is a non-linear relationship bet
22、ween board size and cost of debt, since the benefits can be partly offset by less efficient communication and decision-making, which results in larger cost of debt financing. Hence, the relationship between board size and capital structure is insignificant. Conversely, Merhan (1992), Berger et al. (
23、1997), Abor and Bikpie (2005), and Hassan and Butt (2009) illustrated that larger boards prefer lower debt levels, since larger boards emphasize the importance of “owner-manager”, which prefer equity capital to improve corporate performance.Outside directorsThe directors in the company can be divide
24、d into two parts: outside directors and inside directors. The major difference between the two parts is that outside directors are independent from the company which means they comes from outside of the company and do not participate in daily regulation. Although the two types of directors have dist
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