The Negative Relationship Between the Debt Ratio and Performance of Firms in China

Finding

According to results of two models, the R square of two models is not high, far lower than 1. So model is not fit the date well, this means that there is not significant linear relationship between the explaining variable and the dependent variable and many factors can affect the performance of firms, however the model don’t take them into consider. In the test of significance, only the DAR is pass the test at the 0.1 significant level. Others variables (current liabilities ratio and surplus reserve ratio) cannot pass the T test at the 0.05 significant level.

Overall, we can see that capital structure have a negative relationship with the performance of firms by the significance of debt ratio in the model. This result is consistent with Titman and Wessels (1985), Booth et al (2001), Lu and Xin(1988) and Feng(1999). They also think that the performance of firms have a negative relationship with debt ratio. However, this result is not consistent with Rajan and Zingalas (1995), Frank and Goyal (2009). Since the Titman and Booth research environment is based on developed country, so there is low comparison between the western countries and China. Lu and Feng research is based on China, they choose the different industries as the samples and also use the multiple linear regression model. But this paper thinks that there are special reasons that can arouse the negative relationship between the debt ratio and the performance of firms.

Many reasons can cause the negative relationship between the debt ratio and performance of firms in China. First, the bankruptcy system in China is not perfect, it need supplement and complete constantly for the policy of bankruptcy. The more the debt ratio is, the lower the profitability of fi...

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..., which mainly depends on bank credit. As a result, the conditions of empirical study on debt structure of companies are not mature. The results are only simply reflected the relationship between debt ratio and performance of organization.

Next, the ability of capturing data is limited. The research used ROA as a benchmark to analyze the performance of listed real estate enterprises. However, many other factors should be taken into account as well, such as time factors, land regulations, and supply and demand structure of real estate, and thus the outcome was not comprehensive. In addition, from an empirical aspect, China is facing numerous challenges, like globalization, information, so that real estate is in the dilemma. Therefore, the situation of real estate becomes more complex. With the diversified market environment, all these issues should be considered.