Haomin Chen
ABSTRACT
The choice of debt finance and equity finance has been confusing management, since the usage of debt could introduce both benefits and risks. Due to high growth in Chinese economy these years, understanding the consequences of debt and how to deal with the relevant adverse impacts should be of great significance for Chinese firms. Accordingly, this article will take Chinese listed enterprises as a sample and use the relevant data from 2010 to 2019, to research on the effect of financial leverage on the business performance, measured by Tobin's Q. By using OLS to make the regression analysis, 2SLS to take endogenous tests and many other techniques, this paper draws a conclusion that there is a negative correlation between financial leverage and corporate performance, and managerial confidence level could positively moderate such relationships. Moreover, with further research, this paper finds that, in state-owned enterprises, debt financing could not affect financial performance. This research has significant implications for corporate financing decision-making and corporate governance. It suggests that too many debts above normal level could be harmful to future performance, due to the agency costs and financial risks generated by this extra debt; nevertheless, controlling the confidence of the top management layer by setting a more sensible remuneration system could be a good way to release the negative effects. Based on the research above, suggestions for management are listed: First, corporation should not use too much debt which could break the balance of capital structure; besides, Governance Layer should make more diversified and reasonable remuneration for management teams to avoid overconfidence which might intensify the risks caused by debt; furthermore, the debt capacity of state-owned enterprises could be higher than that of others. At the end of discussion, some limitations of this study and suggestions for future research directions are put forward.
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