A study of the free cash flow and dynamic adjustment of capital structure in public companies

Abstract

Abstract: Based on the financial data of all A-share companies listed on Shanghai Stock Exchange or Shenzhen Stock Exchange before 2003(excluding financial firms) for the time period 2004-2012, and using the system GMM estimator of dynamic panel data model, this paper estimated the target capital structure of China's public companies and calculated an adjustment speed of 0.186. Then we built a fixed-effect model to reflect the joint effects of free cash flow and the deviation of capital structure on adjustment speed of capital structure. The research shows that compared to adjusting the capital structure individually when the company can adjust capital structure and free cash flow simultaneously, the adjustment cost will become lower and the adjustment speed will be faster. After the capital structure is adjusted to (or close to) the target structure, public companies will keep it at the optimal level, regardless of the adjustment of free cash flow. Whether companies face financial constraints or not, the conclusion is robust. But companies facing financial constraints adjust their capital structure at a slower speed, compared with companies not facing financial constraints.

Key words: dynamic adjustment of capital structure, free cash flow, deviation of capital structure, financial constraints

CLC Number:

F272.3

Xiao Ming, Chang Le, Cui Chao. A study of the free cash flow and dynamic adjustment of capital structure in public companies[J]. Science Research Management, 2015, 36(11): 107-116.

References

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