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Equity financing constraints and corporate capital structure: a model

Equity financing constraints and corporate capital structure: a model Purpose – The “supply‐side effect” brought about by the imperfection of the capital market has increasingly been concerned. The purpose of this paper is to study how will the uncertainty of equity financing brought about by the equity financing regulations in emerging capital market affect company's capital structure decisions. Design/methodology/approach – This paper establishes a theoretical model and tries to introduce equity financing uncertainty into the company's capital structure decision‐making. The paper uses mathematical derivation method to get some basic conclusions. Next, in order to characterize the quantitative impact of specific factor on capital structure, numerical solution methods are used. Findings – The model shows that firm's value would decrease with the uncertainty of equity financing, because of the relationship between firm's future cash and their financing policies. The numerical solution of the model suggests that the uncertainty of equity financing is one of the important factors affecting the choice of optimal capital structure, the greater the uncertainty is, the lower optimal capital structure is. Originality/value – The research of this paper has certain academic value for further understanding of the issues. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Equity financing constraints and corporate capital structure: a model

China Finance Review International , Volume 3 (4): 18 – Oct 25, 2013

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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/CFRI-12-2012-0110
Publisher site
See Article on Publisher Site

Abstract

Purpose – The “supply‐side effect” brought about by the imperfection of the capital market has increasingly been concerned. The purpose of this paper is to study how will the uncertainty of equity financing brought about by the equity financing regulations in emerging capital market affect company's capital structure decisions. Design/methodology/approach – This paper establishes a theoretical model and tries to introduce equity financing uncertainty into the company's capital structure decision‐making. The paper uses mathematical derivation method to get some basic conclusions. Next, in order to characterize the quantitative impact of specific factor on capital structure, numerical solution methods are used. Findings – The model shows that firm's value would decrease with the uncertainty of equity financing, because of the relationship between firm's future cash and their financing policies. The numerical solution of the model suggests that the uncertainty of equity financing is one of the important factors affecting the choice of optimal capital structure, the greater the uncertainty is, the lower optimal capital structure is. Originality/value – The research of this paper has certain academic value for further understanding of the issues.

Journal

China Finance Review InternationalEmerald Publishing

Published: Oct 25, 2013

Keywords: Capital structure; Corporate financing; Equity financing preference; Equity financing uncertainty

References