Capital Structure Impacts on Financial Performance of Real Estate in Chinese Stock Exchange - Literature review Example

Capital Structure Impacts on Financial Performance of Real E Listed On Chinese Stock Exchange Adrienn, H. Profitability And Sources Of General Manufacturers In 2009-2011, Annals Of The University Of Oradea, Economic Science Series, 22, 2, pp. 382-389, Business Source Complete, EBSCOhost, viewed 23 February 2015 According to Adrienn, 2013, capital structures of real estate corporations have direct impacts ion the finances and other determiners operational efficiency. Notable areas that depend on capital structure include profitability, how the firms compete in the market and management efficiency. Ease of acquisition of properties by the real estate firms is a function of the capital structure the firms incorporate. There should be a positive balance between the internal and external sources of funds for the firms to operate efficiently. The research paper is relevant for the study. It articulates the dependence of the overall performance of the company and the capital structure preferred by the real estate firms. Brendea, G 2014, Ownership Structure, Performance And Capital Structure Of Romanian Firms, Internal Auditing & Risk Management, 9, 4, pp. 1-9, Business Source Complete, EBSCOhost, viewed 23 February 2015 Brendea, 2014 affirms that the capital structure of a firm affects its performance. Capital structure relates to the ownership structure of most firms listed on the Chinese Stock Exchange. In cases of concentrated ownership among a few shareholders, there exist preferences of use of retained funds as the source of finance to debtors and equity, in that order. Firms adopt contracting more debt as a mechanism of controlling misuse of the firms’ funds by the managers. Managers prefer personal gains to the firms’ financial progress. Such designs of capital structure where shareholders resort to debt contraction help improve the profitability on most of the listed firms. Gosh, Arvin. (2012). Capital Structure and Firm Performance. Piscataway: Transaction Publishers Most firms prefer to obtain the finances from within themselves rather than from outside as outlined in the Pecking Order Theory. According to the theory, real estate firms in China reduce their dependence on borrowed money to fund their investments. Utilization of internal sources of funds results in an increase in profitability. The book is very relevant to the topic of study because it expounds on how equity as a capital affects the profit margins of the company. Iavorskyi, Mykhailo. 2013. The Impact of Capital Structure on Firm Performance: Evidence from Ukraine. Thesis in Fulfillment of MA in Financial Economics. Kyiv School of Economics Iavorskyi, 2013 explains that several theories exist that explain how the capital structures affect the business in various real estate firms listed in the Chinese stock exchange. Modigliani and Miller propose that the owner and capital structure of a firm are the same. The indifference is because the firm’s value in independent from the ratio of debt to equity. The second theory is that of Pecking Order. Agency cost criticized how the performance of a firm depends on the capital structure in use. The paper explains clearly the impact of capital structure on performance confirming its relevance. Javeed, A., Hassan, M, & Azeem., M. 2014, Interrelationship among Capital Structure, Corporate Governance Measures and Firm Value: Panel Study from Pakistan, Pakistan Journal Of Commerce & Social Sciences, 8, 3, pp. 572-589, Business Source Complete, EBSCOhost, viewed 23 February 2015 According to Javeed, Hassan, and Azeem, 2014, capital structure of a firm affects to a small extent the performance of the firm in terms financial gains in an ideal operational environment. The Leverage Irrelevance Theory forms the foundation of this argument. In reality, the ideal situation is non-existence rendering the hypothesis null. Several other theories explain the effect capital structures on performance both financially and operation wise. When external factors like taxes come into play, a change in the ratio of debt and equity influence the performances. The source is very relevant as it gives details on how changes in balance between internal capital, securities and equity affect performance of firms. The effect follows for real estate companies listed in the Chinese Stock Exchange. López-de-Foronda, Ó, López-Iturriaga, F, & Santamaría-Mariscal, M 2007, Ownership Structure, Sharing of Control and Legal Framework: international evidence, Corporate Governance: An International Review, 15, 6, pp. 1130-1143, Business Source Complete, EBSCOhost, viewed 23 February 2015. In firms where the management and ownership are distinct, the decision by managers is under watch by the owners, in most cases shareholders. Debt as a source of finance boosts discipline in the management and has a positive effect on the overall performance of the listed firms. The paper looks at how debt affects the morale of the management. Dependence of a firm on debt as a source of capital for its operations positively affects its performance. The source is relevant. Moyer, R C., Guigan, JM., Rao, R., Kretlow, W. (2011). Contemporary Financial Management. London: Cengage Learning According to Mayor et al., 201, capital structure of firms encompasses the stock, debt and equity. In cases where the firm minimizes its weighted cost of capital, the overall value of the firm goes up. Analysis of capital structure exhibits several assumptions. Real estate company capital structure only affects income distribution among debtors and stockholders. The book explains in detail the variation of company performance through various capital structures. Murray, I, & Sharkey, N. 2014, Chinese investment in Australian resources: can the legal debt/equity distinction still create windfalls and impediments?, Australian Tax Forum, 29, 4, pp. 667-714, Business Source Complete, EBSCOhost, viewed 23 February 2015 Some of the firms listed in the Chinese Stock Exchange invest outside the country to expand the capital base. Investment as a component of equity as a capital structure and is an analog of ordinary shares common in real estate firms listed in the Stock Exchange Market. Companies that have substantial equity capital base excel in terms of performance. Such property companies are capable of expanding their operations without much struggle. Quiry, P., & Vernimmen, P. (2011). Corporate finance: theory and practice. Chicester: Wiley Quiry and Vernimmen, 2011 argues that the advantage effect of capital structure encourages managers in a real estate firm to adopt strategies that lead to excellence in the company to cover heavy debt burden. The cash generated should sufficiently enable the listed firms to cater for servicing of existing debts and operations of the company. The source is relevant because it discusses how the debt burden of the firms relates to performance. Rizov, M 2008, Corporate Capital Structure And How Soft Budget Constraints May Affect It, Journal Of Economic Surveys, 22, 4, pp. 648-684, Business Source Complete, EBSCOhost, viewed 23 February 2015 Rizov, 2008 argues that transformation in the borrowing mechanisms of the real estate firms listed on the Chinese Stock Exchange impact on the economies of the companies. Overreliance on the state as the source of capital reduced the control of the state on the firms. The state monopolies in controlling the financial adventures of the firms depend on how much the firms depend on the government as a source of its funds. The change allows firms to seek funds from outside the firms and become more independent. The management of the firms becomes motivated due to limited government control and performance improves. The source is relevant because it explains the source of capital and its effect on performance. Bibliography Adrienn, H 2013, Profitability and Sources of General Manufacturers In 2009-2011, Annals Of The University Of Oradea, Economic Science Series, 22, 2, pp. 382-389, Business Source Complete, EBSCOhost, viewed 23 February 2015. Brendea, G 2014, Ownership Structure, Performance And Capital Structure Of Romanian Firms, Internal Auditing & Risk Management, 9, 4, pp. 1-9, Business Source Complete, EBSCOhost, viewed 23 February 2015 Gosh, Arvin. (2012). Capital Structure and Firm Performance. Piscataway: Transaction Publishers Iavorskyi, Mykhailo. 2013. The Impact of Capital Structure on Firm Performance: Evidence from Ukraine. Thesis in Fulfillment of MA in Financial Economics. Kyiv School of Economics Javeed, A, Hassan, M, & Azeem, M 2014, Interrelationship among Capital Structure, Corporate Governance Measures and Firm Value: Panel Study from Pakistan, Journal Of Commerce & Social Sciences, 8, 3, pp. 572-589, Business Source Complete, EBSCOhost, viewed 23 February 2015 López-de-Foronda, Ó, López-Iturriaga, F, & Santamaría-Mariscal, M 2007, Ownership Structure, Sharing of Control and Legal Framework: international evidence, Corporate Governance: An International Review, 15, 6, pp. 1130-1143, Business Source Complete, EBSCOhost, viewed 23 February 2015. Murray, I, & Sharkey, N 2014, Chinese investment in Australian resources: can the legal debt/equity distinction still create windfalls and impediments?, Australian Tax Forum, 29, 4, pp. 667-714, Business Source Complete, EBSCOhost, viewed 23 February 2015 Quiry, P., & Vernimmen, P. (2011). Corporate finance: theory and practice. Chicester: Wiley Rizov, M. (2008), Corporate Capital Structure and How Soft Budget Constraints May Affect It, Journal Of Economic Surveys, 22, 4, pp. 648-684, Business Source Complete, EBSCOhost, viewed 23 February 2015. Read More