ME  Vol.3 No.5 , September 2012
Equity Financing Regulation and the Optimal Capital Structure: Evidence from China
Abstract: The “Supply-side effect” on financial management caused by market imperfection has increasingly been concerned. During the transition period, there is strict securities regulation in China’s capital market, which brings the supply-side constraints to corporate financing. Using the data of listed companies those take secondary equity offerings between 1993-2007 in China’s A-share market, the paper examines how the change of regulation policies on SEOs affects cor-porate financing decisions. Our result shows that regulation policy is a significant factor to the amount of refinancing and the optimal capital structure. This result provides important evidence on how the equity regulation environment affects corporate financial management.
Cite this paper: Z. Wang and W. Zhu, "Equity Financing Regulation and the Optimal Capital Structure: Evidence from China," Modern Economy, Vol. 3 No. 5, 2012, pp. 508-517. doi: 10.4236/me.2012.35066.

[1]   F. Modigliani and M. H. Miller, “The Cost of Capital, Corpora-tion Finance and the Theory of Investment,” The American Economic Review, Vol. 48, No. 3, 1958, pp. 261-297.

[2]   F. Modigliani and M. H. Miller, “Corporate Income Taxes and the Cost of Capital: A Correction,” The Ameri- can Economic Re-view, Vol. 53, No. 3, 1963, pp. 433-443.

[3]   N. D. Baxter, “Leverage, Risk of Ruin and the Cost of Capital,” Journal of Finance, Vol. 22, No. 3, 1967, pp. 395-403.

[4]   M. Bradley, G. A. Jarrell and E. H. Kim, “On the Exis- tence of an Optimal Capital Structure: Theory and Evi- dence,” Journal of Finance, Vol.39, No.3, 1984, pp. 857- 878. doi:10.1111/j.1540-6261.1984.tb03680.x

[5]   S. C. Myers and N. S. Majluf, “Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have,” Journal of Financial Economics, Vol. 13, No. 2, 1984, pp. 187-221. doi:10.1016/0304-405X(84)90023-0

[6]   S. C. Myers, “The Capital Structure Puzzle,” Journal of Finance, Vol. 39, No. 3, 1984, pp. 575-592. doi:10.2307/2327916

[7]   M. C. Jensen and W. H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics, Vol. 3, No. 4, 1976, pp. 305-360. doi:10.1016/0304-405X(76)90026-X

[8]   S. C. Myers, “De-terminants of Corporate Borrowing,” Journal of Financial Economics, Vol. 5, No. 2, 1977, pp. 147-175. doi:10.1016/0304-405X(77)90015-0

[9]   S. Titman, “The Modigliani and Miller Theorem and Market Efficiency,” Working Paper 8641, National Bureau of Economic Research (December 2001).

[10]   J. C. Stein, “Rational Capital Budgeting in an Irrational World,” Journal of Business, Vol. 69, No. 4, 1996, pp. 429-455. doi:10.1086/209699

[11]   J. R. Graham and C. R. Harvey, “The Theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics, Vol. 60, No. 2, 2001, pp. 187- 243. doi:10.1016/S0304-405X(01)00044-7

[12]   J. C. Brau and S. E. Fawcett, “Initial public Offerings: An Analysis of Theory and Practice,” Journal of Finance, Vol. 61, No. 1, 2006, pp. 399-436. doi:10.1111/j.1540-6261.2006.00840.x

[13]   T. Loughran, J. R. Ritter and K. Rydqvist, “Initial Public Offerings: International Insights,” Paci?c Basin Finance Journal, Vol. 2, No. 2, 1994, pp. 165-199. doi:10.1016/0927-538X(94)90016-7

[14]   A. Hovakimian, T. Opler and S. Titman, “The Debt-Eq- uity Choice,” Journal of Financial and Quantitative Analysis, Vol. 36, No. 1, 2001, pp. 1-24. doi:10.2307/2676195

[15]   M. Baker and J. Wurgler, “Market Timing and Capital Structure,” Journal of Finance, Vol. 57, No. 1, 2002, pp. 1-32. doi:10.1111/1540-6261.00414

[16]   I. A. Strebulave, “Do Tests of Capital Structure Theory Mean What They Say?” Journal of Finance, Vol. 62, No. 4, 2007, pp. 1747-1787. doi:10.1111/j.1540-6261.2007.01256.x

[17]   E. O. Fischer, R. Heinkel and J. Zechner, “Dynamic Capital Structure Choice: Theory and Tests,” Journal of Finance, Vol. 44, No. 1, 1989, pp. 19-40. doi:10.1111/j.1540-6261.1989.tb02402.x

[18]   A. Alti, “How Persistent Is the Impact of Market Timing on Capital Structure?” Journal of Finance, Vol. 61, No. 4, 2006, pp. 1681-1710. doi:10.1111/j.1540-6261.2006.00886.x

[19]   L. Booth, V. Ai-vazian, A. Demirguc-Kunt and V. Maksimovic, “Capital Struc-tures in Developing Countries,” Journal of Finance, Vol. 56, No. 1, 2001, pp. 87-130. doi:10.1111/0022-1082.00320

[20]   W. S. Kim and E. H. So-rensen, “Evidence on the Impact of the Agency Costs of Debt on Corporate Debt Policy,” Journal of Financial and Quantitative Analysis, Vol. 21, No. 2, 1986, pp. 131-144. doi:10.2307/2330733

[21]   R. G. Rajan and L. Zingales, “What Do We Know about Capital Structure? Some Evidence from International Data,” Journal of Finance, Vol. 50, No. 5, 1995, pp. 1421-1460. doi:10.1111/j.1540-6261.1995.tb05184.x

[22]   C. J. Smith and R. L. Watts, “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies,” Journal of Financial Economics, Vol. 32, No. 3, 1992, pp. 263-292. doi:10.1016/0304-405X(92)90029-W

[23]   J. K. Wald, “How Firm Characteristics Affect Capital Structure: An International Comparison,” Journal of Fi- nancial Research, Vol. 22, No. 2, 1999, pp. 161-187.

[24]   A. Hovakimian, “Are Observed Capital Structures De- termined by Equity Market Timing?” Journal of Finan- cial and Quantitative Analysis, Vol. 41, No. 1, 2006, pp. 221-243. doi:10.1017/S0022109000002489

[25]   A. Kayhan and S. Titman, “Firms’ Histories and Their Capital Structures,” Journal of Financial Economics, Vol. 83, No. 1, 2007, pp. 1-32. doi:10.1016/j.jfineco.2005.10.007

[26]   S. Chaplinsky and G. Niehaus, “Do Inside Ownership and Leverage Share Common Determinants,” Quarterly Jour- nal of Business and Economics, Vol. 22, No. 4, 1993, pp. 51-65.

[27]   S. Titman and R. Wessels, “The determinants of Capital Structure Choice,” Journal of Finance, Vol. 43, No. 1, 1988, pp. 1-19. doi:10.1111/j.1540-6261.1988.tb02585.x

[28]   Z. Wang, D. Zhao and W. Zhu, “Market Timing in Sea- soned Equity Of-ferings with Security Issue Regulation and Its Impact on Capital Structure,” Nankai Business Review, Vol. 10, No. 6, 2007, pp. 40-46.

[29]   E. F. Fama and M. C. Jensen, “Agency Problems and Residual Claims,” Journal of Law & Economics, Vol. 26, No. 2, 1983, pp. 327-349. doi:10.1086/467038

[30]   M. C. Jensen, “Agency Costs Of Free Cash Flow, Corpo- rate Finance, and Takeovers,” American Economic Review, Vol. 76, No. 2, 1986, pp. 323-329.