On capital structure (1)
Capital structure is the focus of financial management and the top priority of enterprise management, and capital structure analysis is the inevitable requirement of enterprise development.
MM theory, agency theory, pecking order theory and information asymmetry theory.
First, an overview of the capital structure theory
Capital structure refers to the proportion of long-term capital of enterprises from different sources, mainly from two aspects-debt capital and owner's equity. Therefore, the discussion of enterprise capital structure is the analysis of enterprise debt capital ratio. Capital is the source of all production and operation of an enterprise and exists in all aspects of the enterprise, so capital structure analysis plays an important role in financing decision-making, project investment, financial analysis, financial management and enterprise management.
Generally speaking, our common capital structure theories include MM theory, agency theory and pecking order theory.
MM theory
This theory was put forward by Professor modigliani and Professor Miller in the United States, so it is called MM theory for short. When it was first put forward, the company's capital structure had nothing to do with the company's market value without considering the company's income tax and the same operating risk but only the different capital structure. In other words, when the company's debt ratio increases from zero to 100%, the total cost and total value of the enterprise will not change, that is, the enterprise value has nothing to do with whether the enterprise is in debt or not, and there is no optimal capital structure problem. This is the original MM theory, and the influence of income tax was considered in the later revision of MM theory. Because debt interest is tax-free expenditure, it can reduce the comprehensive capital cost and increase the enterprise value. Therefore, as long as the company continuously reduces its capital cost through increasing financial leverage, the more liabilities, the more obvious leverage and the greater the company value. When the debt capital is close to 100% in the capital structure, it is the best capital structure and the enterprise value reaches the maximum.
Both the original MM theory and the revised MM theory are about two extremes of capital structure. Both of them have defects, provided that the capital market is perfect and the capital flows freely. However, there is no perfect capital market in reality, and there are many factors that hinder capital flow, especially income tax. Therefore, MM theory is not suitable for analyzing practical problems.
(B) agency theory
The premise of agency theory is that the management right and ownership of enterprises are different, and the interests pursued by owners and managers are deviated. There are three kinds of agency relationship: the agency relationship between shareholders and debtors, the agency relationship between shareholders and managers, and the agency relationship between managers and debtors. Because the principal and the agent have different interests, different contracts and asymmetric information, agency costs will occur. In order to reduce agency costs, enterprises have studied the choice and arrangement of equity and creditor's rights structure, emphasizing that the key of enterprise property right structure is the unity of residual rights and ownership.
However, the defect of agency theory is that it thinks that the more levels of agency and chain, the greater the agency cost, so the way to reduce the agency cost is to reduce the agency level and chain level. In reality, there are more and more principal-agent levels and chain levels, and there are more and more agent levels similar to online products, so the conclusion of agency cost is not in line with reality to some extent. Secondly, the agency cost is based on the deviation of the interests of the principal and the agent, but in reality, the interests of the principal and the agent of the enterprise are basically the same, so the agency cost is very low. The only inconsistency will gradually disappear with the improvement of the incentive system, so it is not appropriate to emphasize the deviation of their interests.
(C) Theory of pecking order
Pecking order theory originated from MM theory, among which the trade-off theory is the most representative. If MM theory is strictly established, the theory of precedence is not established, but in real life, because MM theory is too strict, it is not established in many cases, so the theory of precedence is produced. This theory has different development directions:
(1) In the case of mainly considering the tax shielding effect, financial and bankruptcy risks and corresponding costs brought by debt financing to enterprises, it is concluded that capital structure is related to enterprise value; At least in theory, there is an optimal capital structure that can maximize the value of enterprises.
(2) Considering the influence of enterprise income tax, individual income tax and bankruptcy risk (regardless of bankruptcy cost) on enterprises, it is concluded that enterprise value is still irrelevant to enterprise capital structure.
(3) Under the condition of mainly considering the information asymmetry between internal and external stakeholders and the corresponding agency cost, it is concluded that the enterprise value is related to the capital structure and there is an optimal capital structure.
Second, the influencing factors of capital structure
Facing the differences between different enterprises and the same enterprise, we should use different theories to analyze the specific situation. The specific factors that affect the capital structure of enterprises include the following two aspects:
internal factor
Internal factors usually include sales growth rate, financing preference, industry characteristics, ownership structure, asset structure and so on. The higher the sales growth rate, the more profits the enterprise has, the lower the debt financing level of the enterprise, and the higher the debt level. For the asset structure, general assets are easier to mortgage and pledge to obtain loans than special assets, which improves the asset-liability ratio.
(2) External factors
External factors usually include industry environment, capital market environment and corporate reputation. When the capital market is stable and perfect, the interest rate will be low and there will be more financing channels. Diversified financing methods will increase the capital cost of enterprises.
Third, the quantitative analysis of capital structure
If, as mentioned above, the capital structure of an enterprise is analyzed only from the qualitative aspect by using the corresponding theory, it will inevitably affect the analysis results due to information asymmetry and subjective factors, deviate from the real results, and can not really play a guiding role in financial management and enterprise management, so it still needs to be analyzed from a quantitative perspective. The methods of quantitative analysis include:
(A) the cost of capital comparison method
The capital cost comparison method refers to calculating the weighted average capital cost of various long-term financing portfolio schemes based on market value without considering the constraints of various financing methods in quantity and proportion and the differences of financial risks, and selecting the financing scheme with the smallest weighted average capital cost according to the calculation results to determine the relatively optimal capital structure.
(B) Enterprise value comparison method
The way to determine the best capital structure is to calculate and compare the total market price of companies under various capital structures.
(3) neutral equilibrium method
When there are two options of debt financing and stock issuance financing, when the expected earnings before interest and tax are greater than the earnings before interest and tax with no difference in earnings per share, debt financing is better, and vice versa.
Although each method has its advantages, there are some defects, so the optimal target structure we require should not be a specific numerical ratio, but should be within a reasonable range. The capital structure of enterprises should fluctuate within this moderate range, not to maintain the optimal capital structure, but to constantly adjust the capital structure by adjusting the debt ratio of enterprises according to the difference between the actual capital structure and the optimal capital structure.
References:
Chen Xueqin. Analysis of capital structure of listed companies in China. Journal of Zhengzhou Institute of Light Industry (Social Science Edition), 20 1, February 1.
[2]MBA core curriculum writing group. Financing decision [A]. Chief financial officer. Beijing: Kyushu Press, 2002.
On capital structure and its optimization.
This paper mainly discusses the concept of capital structure and how to optimize it. The concept of capital structure is discussed from two aspects: one is the definition of capital structure; The second is the type of capital structure. The optimization of capital structure is also discussed from two aspects: first, the adjustment method of enterprise capital structure; The second is to optimize the capital structure of different enterprises.
Keywords: conservative capital structure; Moderate capital structure; Venture capital structure
1. What is the capital structure?
(A) the concept of capital structure
Capital structure, also known as financing structure, refers to the organic composition and proportional relationship between funds obtained from different channels when enterprises raise funds. It includes not only the proportion of liabilities and equity, but also the proportion of current liabilities and long-term liabilities in all liabilities and the proportion of equity capital. Capital structure is related to enterprise financing, operation, benefit distribution and other aspects, and it is an important factor affecting the long-term solvency of enterprises, and also an important indicator to test the financial risks of enterprises.
(B) the type of capital structure
Different capital structures have different capital costs and financial risks. The cost of capital refers to the price that an enterprise has to pay for a certain kind of capital. Financial risk refers to the obligations and possible risks that enterprises bear to fund providers because of raising funds. The best capital structure is the financing structure with the lowest capital cost and the least financial risk. In fact, this capital structure does not exist. Low capital cost is often accompanied by high financial risk, and low financial risk is accompanied by high capital cost. Enterprises should choose the most suitable capital structure for their own survival and development according to their own actual situation, weighing between financial risks and capital costs. There are three capital structures in practice: conservative capital structure, moderate capital structure and venture capital structure.
Conservative capital structure means that sovereign capital financing is mainly used in the capital structure, and long-term debt is mainly used in the debt financing structure. Under this capital structure, enterprises reduce the short-term debt repayment pressure and have lower financial risks. However, due to the high cost of sovereign capital financing and long-term debt financing, the capital cost of enterprises will increase. This shows that this is a capital structure with low financial risk and high capital cost. Generally applicable to operators who prefer low financial risks, newly-built enterprises or small-scale enterprises.
The golden mean capital structure means that the proportion of sovereign capital financing and debt financing is mainly determined by the use of funds, that is, sovereign capital financing and long-term debt financing are mainly used to buy long-term assets such as factories, machinery and equipment, while current debt financing is mainly used to buy current assets such as materials, fuel and office supplies. At the same time, the ratio of sovereign capital to debt capital financing should be kept at a reasonable level. It can be seen that this is a capital structure with medium financial risk and medium capital cost. Most enterprises can adjust the financing ratio of sovereign capital and debt capital according to their own conditions and adopt the golden mean capital structure.
Risk-oriented capital structure means that debt financing is mainly used in capital structure, and current liabilities are also occupied by long-term assets. Under this capital structure, enterprises have little sovereign capital and low capital cost, but they have a lot of debt financing, so enterprises have to face severe loan pressure, high financial risks and the possibility of bankruptcy at any time. It can be seen that this is a capital structure with high peak financial risk and low capital cost. In practice, high-risk industries will inevitably bring high profits, so only special enterprises will adopt venture capital structure under certain circumstances.
Second, how to optimize the capital structure of enterprises?
(A) the adjustment method of enterprise capital structure
When enterprises raise funds, with the changes of the surrounding economic environment, the capital structure also presents a dynamic structural adjustment process. There are two ways to adjust capital structure: stock adjustment and flow adjustment.
Stock adjustment is a structural conversion between existing self-owned capital and liabilities under the scale of existing assets of enterprises, which is mainly used in the case of high debt ratio of enterprises.
Flow adjustment is to rationalize the original capital structure by increasing or decreasing the existing capital of enterprises. Method 1: increase the existing capital of the enterprise. If the enterprise's asset-liability ratio is too low and the enterprise's benefit is good, additional loans can be used for confiscation and financial leverage. The key to optimizing capital structure is to determine the appropriate ratio of liabilities to owners' equity. Enterprises can determine the loan amount by comparing the profit rate of investment and the cost rate of capital. Generally speaking, when the investment profit rate is higher than the capital cost rate, the more funds are lent, the operators of enterprises make full use of financial leverage, and investors can get more profits; When the investment profit rate is lower than the cost of capital, at this time, enterprise managers should reduce the borrowed capital as much as possible and make full use of their own capital, so that enterprise owners will not lose more profits that should belong to them. The second method is to reduce the existing capital of enterprises. If the enterprise's asset-liability ratio is too high and its financial image is poor, we can repay the debt in advance and improve the credit rating of the enterprise.
(B) Measures to optimize the capital structure of different enterprises
I think in real life, there is an optimal combination of capital structure objectively. Debt financing is the lowest capital cost financing method. Among the various sources of funds for enterprises, the interest on debt funds is paid before the enterprise pays income tax; Moreover, creditors bear relatively less risks than investors and require relatively low returns, so the cost of debt funds is usually the lowest. Although the capital cost of debt financing is lower than other financing methods, it cannot be measured by the cost of a single fund. Only when the total capital cost of the enterprise is the lowest can the debt level be reasonable, and the influence of the increase of financial risk on the capital cost must be considered. In the decision-making of fund-raising, enterprises should constantly optimize the capital structure according to their own actual conditions, so as to make the capital structure more reasonable. Different enterprises should adopt different capital optimization measures.
For small-scale or newly-built enterprises, we should first adopt a cautious attitude and control the debt financing of the enterprise with the average asset-liability ratio of the industry as the standard. Secondly, because enterprises are newly built or small in scale, and their ability to resist risks is weak, sovereign capital financing can be used as much as possible; At the same time, in debt financing, long-term liabilities are the main ones. Although this will increase the cost of capital, it can reduce the short-term debt repayment pressure of enterprises, thus reducing financial risks.
As far as many general enterprises are concerned, although the asset-liability ratio is high, the operation of enterprises is basically neither profit nor loss, or a little savings, or a little loss. In this case, its capital structure should be based on stock adjustment. Confiscation and restructuring of non-performing loans of corporate banks by debt-to-equity swap policy. With the financial asset management company as the main investor, the creditor's rights will be converted into equity, and the original debt service will be converted into share dividends. So as to optimize the capital structure of enterprises.
For enterprises with good economic benefits, large scale and good reputation, due to their strong ability to resist risks, they can adopt the method of flow adjustment to reduce the asset-liability ratio. Increase the number of existing assets of enterprises, increase share capital or increase loans, further expand the scale of enterprise operation and enhance market competitiveness. Thereby further optimizing the original capital structure.