Corporate Finance: Theory and Practice in China

Besides regulation and policy, another important issue for listed companies considering equity financing is "to introduce the strategic investors, to improve the corporate governance structure and to absorb the new idea or technology."

On the topic of debt financing, the report shows that the factors that affect a company's choice of debt include profitability and cash flow fluctuation, credit grade, the transaction cost and fee of debt financing, the tax shield effect of the interest expense and the possibility of the financial distress caused by debts. "The good news is that companies do consider their solvency and ability to obtain money. However, ignoring the possibility of financial distress, meanwhile, seduces the companies into over borrowing and over investment. The survey shows that policy and institutional constraint play an important role in the debt financing in China," comments Zhang.

Do China's listed companies choose financing options based on stock market prices? The research says no. The result of the survey shows that "the possibility of issuing stock with a high price because of recent price increases in the company's stock" is not a big concern of the company when making a decision on issuing new shares. Also, "the under-evaluation of the stock price" is not the reason for the company to issue the convertible bonds. "Convertible bonds are a means of delaying an issue. However, unlike the companies in western countries that delay an issue because the current stock price is under-priced, Chinese companies delay an issue to get around the government's requirements that the company currently cannot satisfy," says Li. As mentioned earlier, the issuing behavior of China's listed companies is mainly determined by policy and whether the company satisfies requirements set by regulators.

Do Li and Zhang think China's listed companies' financing behavior protects the shareholders' interest? "American companies care more about shareholders' interests, while Japanese and German companies care more about the relevant stakeholders -- including employees, managers, the community and the environment," the two researchers note. "As for China's listed companies, it's not consistent yet and it's in a transforming process. Initially, the company was protecting the interests of the insiders and the majority shareholders. Now it cares more about all shareholders. In the future, will it put more emphasis on the relevant stakeholders? We don't exclude such a possibility."

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