Impact of Capital Structure on Financial Performance of Real Estate Firms in China - Essay Example

The industry has made a significant contribution to economic development as it has become a preferred choice for foreign investors. Many firms within the industry are owned by the government and the capital structure of listed firms is operated by listed organizations, which utilize a culture of collectivism in making capital structure decisions.

The study analyses the listed firms based on the following objectives
• To critically analyze the capital structure adopted by 20 firms listed on the Chinese Stock Exchange.
• To critically determine the relationship between capital structure and different variables of firms listed on the Chinese Stock Exchange such as profitability and gearing, etc.
• To critically investigate the factors influencing the capital structure of firms listed on the Chinese Stock Exchange.

Methodology
The study is a descriptive research design that explores the capital structure of companies listed in the Chinese stock exchange is seeking to describe their impact on the financial performance of the same companies. Information about 20 companies was collected from the official website of the Shanghai Stock Exchange (SSE). The companies were selected in accordance with the composite index of the SSE, to ensure the findings can be generalized to other firms. Quantitative data analysis methods have been utilized in analyzing the data gathered from the research with regression analysis being utilized to enhance the quality of the research findings.

Results
Different financial ratios of companies have been calculated and an industry average determined. The ownership of the listed firms is mainly by the government and legal institutions who own 28% and 24% respectively. The total debt and long-term debt of the listed companies are 50.49% and 10.15% respectively. The equity over fixed asset ratio for the companies is at 92.77%. There has been a significant drop in the return on assets value which is currently at 9.74%. Chinese firms have an average liability of about 45% while the average liability of the G-7 countries is 54%.

Conclusion
Most of the Chinese companies listed on the SSE utilize short-term financing options and this has been the main characteristic of their capital structure. These firms are mainly financed through equity capital which is not a debt. Low debts have had a significant effect in resulting in high profits since there is a reduced level of interest paid, ensuring the companies have reduced financial obligations on their working capital. The privatization effect within the industry has caused firms to shift to the Chinese capital market for capital funding of the previously, state-owned firms. Read More