Choice of Timing of Corporate Debt Financing
Linan Wang
1
,Jingrong Li
1
1
Department of Accounting, Jilin University of Finance and Economic, Jingyue Street, Changchun, China
Keywords: Debt financing ;balance theory ;market timing theory; timing decision.
Abstract: According to the current corporate debt financing inappropriate timing of the situation, through the research
on the history of the development of finance theory review, found that listed companies can be trade-off
theory and market timing theory combined with the financing decisions on the timing.Capital structure
analysis of the trade-off theory as a reference of the major factors and market timing as auxiliary reference
factors, more beneficial to accurately determine the timing of debt financing. Break through the past only
through a theory to analyze the timing of the financing of the current situation, make the analysis more
comprehensive, more convincing.
1 INTRODUCTION TO THE
THEORY OF TIMING OF
CORPORATE DEBT
FINANCING
1.1 Trade-off theory
The main emphasis of the trade-off theory is that the
company does have the most efficient capital
structure. It believes that the enterprise can obtain
the advantage of reducing the enterprise income tax
from the debt, the increase of liability can reduce the
average cost of capital. But the company will also
increase the cost of bankruptcy and corporate risk
because of the increase in liabilities, which makes
the average capital cost increased. Therefore, the tax
shield effect and the bankruptcy cost make the
capital structure of enterprises in the most efficient
position, at this time, the average capital cost is in
the least position.
1.2 Market timing theory
Market timing theory is different from the traditional
finance theory.In the past, we start from the financial
point of view of financing to fight for the interests of
the company, and the market timing theory is from
the ever-changing market to choose a favorable
opportunity to finance.In short, the theory is not the
focus of the company's capital structure and the
relationship between the optimal capital structure.
When dealing with debt financing, equity financing
problems usually use market timing theory. Such as:
The first example: A company shares of the issued
total of $1 billion, total float cost of $30 million.
When equity financing is not carried out, the equity
value of $750 million. When equity financing, the
corresponding adjustment of the net present value of
$220 million. Therefore, the company needs to bear
the remaining $30 million to make up the $250
million of the original shareholders of the wealth.
The second example:B company value is undervalue
by 25 percentage points after, only $1 billion to have
the ability to create $1 billion 250 million of wealth,
and the corresponding adjustment of the net present
value of $250 million. The $250 million flow
process for specific performance reduction of $250
million from the exercise of shareholder, and the
shareholder equity holdings increased $250 million.
In summary, the company managers to consider the
market timing rather than the capital structure of the
company's internal for the company's shareholders to
earn a huge profit.
According to the influence factors and research
methods, the theory of market timing theory is not
the same, which is shown as the following indicators:
Book ratio of market capitalization, direct and
indirect financing costs and the issue of peak season,
etc.
74
74
Li J. and Wang L.
Choice of Timing of Corporate Debt Financing.
DOI: 10.5220/0006444000740078
In ISME 2016 - Information Science and Management Engineering IV (ISME 2016), pages 74-78
ISBN: 978-989-758-208-0
Copyright
c
 2016 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

2 THEORETICAL ANALYSIS ON
THE TIMING OF CORPORATE
DEBT FINANCING
2.1 Applying the tradeoff theory to
analyze the timing of debt financing
The core content of trade-off theory is the company's
capital structure to achieve the most perfect statet,
in other words, the operation of the company's
capital to achieve a balance point, known as the
target leverage ratio. The basic content of the theory:
first, in the precondition of tax shield protection, in
the precondition of tax shield protection, the
company's debt level and average capital cost is
inversely proportional.The higher the debt, the lower
the cost and vice versa,eventually lead to the
company's debt financing to seek certain benefits for
their own; secondly, the protection status of the tax
shield can't be extended indefinitely.because the
company itself needs a certain cost to have the
ability to repay the debt..In the process of constantly
improving the level of debt, agency costs, the cost of
the financial crisis, the existence of bankruptcy costs
will lead to more and more debt costs, the final tax
shield can not meet the high increase of the cost of
debt..In summary, the company's capital structure to
achieve the most perfect optimal state is also the
average cost of the company's average cost of capital.
According to the content of the trade-off theory, for
the debt financing, the company's managers do
everything we can to achieve the theory of the
optimal capital structure. With the gradual
realization of optimal capital structure, debt and
equity financing process will be smoothly done or
easily solved.So as to achieve the most perfect ratio,
the average cost of the company's capital is the
lowest, and the benefits are maximized.Company
managers constantly perfect the specific
performance of debt and equity issues in the process
of corporate structure for the following two points:
first, the company structure did not reach the optimal
capital structure, considering the debt problem,
namely debt financing; second, the company
structure is higher than the optimal capital structure,
the company from the perspective of equity
perspective, namely equity financing. Therefore,
when the company choose debt financing, first to
determine the relationship between the structure and
the optimal capital structure of the company, after
the analysis of the conclusion, and then choose the
way of debt financing, so as to reap the greatest
benefits.
2.2 Applying market timing theory to
analyze the timing of debt financing
Market timing theory is not only applicable to equity
financing, but also applies to certain debt financing.
In our country, debt financing from the market point
of view, there are three main factors: equity
financing substitution, market cost and policy
timing(Zhiqiang,2009). Described as the following
two conditions: first, equity financing has the
advantage conditions, selection of equity financing,
debt financing is not considered; second, The low
interest rate of the debt financing market and the site
policy is conducive to the issuance of
securities,choose debt financing.
2.2.1 An Analysis of the Substitution of
Equity Financing
According to the content mentioned above, the
company's financing methods can be summarized as
equity financing and debt financing. According to
the different financial market and market timing,
select different financing methods, and the two can
substitute each other. When studying the existing
financing methods in our country, we mainly discuss
the vicarism of equity financing to debt financing.
Each one has its own merits, two kinds of financing
theory, we should choose different financing ways
according to the actual situation, so as to find the
development for the company's interests. Due to the
different cultural regions, in China's financial market,
most listed companies in equity financing, ignoring
the advantages of debt financing.
By Guixin Han research, the company listed in the
previous period of time, usually do our best to
improve all kinds of preparations in order to have
the ability to conduct large-scale equity financing
after the listing(Guixin,2006). Specific performance:
the unlisted companies through a short time to
enhance their own strength after the issuance of
shares of listed companies, successfully listed after
preparing the right allotment and issuance of
refinancing, so there are "hot issue" and "heat"
phenomenon in China's listed companies issue.
So the proportion of equity financing in our country
is larger in the way of financing, in general, it will
not take credit financing.
2.2.2 Analysis of Cost Timing
From the literal point of view, the cost timing is low
cost time; researchers will enterprise comprehensive
cost of debt financing is low time known as the cost
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Choice of Timing of Corporate Debt Financing
75

of timing.The cost is composed of the coupon rate,
the loan interest rate, transaction costs and other
financial costs. When the third party financing and
trade relations and to pay a certain sum of money to
the third party called the cost of transaction costs,
the company itself for the financing and the
additional expenses attributed to other financial
costs, because these two kinds of cost less affected
by changes in the market, so negligible considering
the cost of time. So the main influence factors of the
cost timing is the face interest rate or the loan
interest rate.
The coupon rate or loan interest rate factors
including market interest rate level, industry level of
risk, the enterprise's own business situation, the 3
Influence Factors and the comprehensive cost of
debt financing is proportional to. On the one hand,
the lower the level, the better the business situation,
the lower the cost; on the contrary, it is the opposite.
On the other hand, the impact of the three factors on
the comprehensive cost of corporate debt financing
is independent of each other, there is no correlation
between the two.The effect of the same between the
two is not dependent on the relationship between the
two .For example, in 2015 China's overall decline in
interest rates led to the situation when the economic
downturn, coal, steel and other industries with
excess production capacity increased risk levels.
Although the majority of Chinese listed companies
with equity financing,but the specific ways to carry
out financing methods are different .After the data
analysis was carried out by using the measurement
model of Liu .we draw the following conclusions:
the enterprise to reduce the comprehensive cost of
debt financing way for debt financing, in order to
cope with the market interest rate level is low the
situation(Lanbiao,2012).
2.2.3 Analysis of the Timing of the Policy
Due to the nature of our country, some of the
policies of the government will have a direct impact
on economic development, debt financing is also
listed in this. Companies in related behavior at the
same time according to the current policy to get
maximum benefit.
With the most typical corporate bonds: in some
developed countries, the debt market has long been
and so far has a certain size, and China has just
entered the right track. The earliest can be traced
back to nine years ago, China has just begun the
formal approval of this: "corporate bonds issuance
pilot approach".After that, the debt market of our
country began to develop slowly.In order to improve
the current debt market, at the end of 2014, the
government began to collect all walks of life on the
debt industry related advice-- "corporate bond
issuance and transaction management approach",and
after a period of time to achieve effective results -- "
corporate bonds issuance and transaction
management approach"issueso that is more
conducive to the future development of the debt
industry.
3 THE TRADE-OFF THEORY
AND MARKET TIMING
THEORY COMBINED
The following mainly through two directions in the
process of debt financing in the process of how to
grasp the best opportunity, these two directions are
trade off theory and market timing theory.
According to the trade-off theory, we can know that
there is a best of its own capital structure for each
company, and not any time to start debt
financing.When there is a gap in the best capital
structure, debt financing is the best form. When
higher than the best structure is not the best model,
then the need for equity financing rather than debt
financing.
According to the theoretical analysis of the balance
of the capital structure of the company's choice of
debt financing is the main impact factor,at the same
time also need to auxiliary reference market timing
factor.
But the importance of market timing is closely
related to the target leverage ratio. For every
enterprise has an optimal leverage ratio.First of all,
when they are away from the leverage ratio, there is
a certain gap,they do not consider the market
opportunity.,because the market timing of benefit is
far lower than that caused by other losses, and for
those with the leverage ratio is very small distance
between enterprises at this point, consider the
market opportunity to bring extra income, because it
itself has achieved the goal of leverage, can increase
revenue through the consideration of other factors.
Explain the following specific target leverage ratio
influence on market timing: the current leverage
ratio than the optimal leverage ratio is high, the
enterprise will be financially facing a very grim
situation, because the loan ratio is relatively large,
limited the further development of the enterprise, is
the enterprise and lend a party there some of the
contradictions; the current leverage ratio is low,
although the market timing can bring benefits, but
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the income is very small, you can choose other ways
to increase revenue.
In short, when the leverage ratio does not reach the
optimal leverage, to consider the market timing of
the gain is not a wise choice, will bring greater risk
and loss. So an enterprise to decide whether to use
the market timing, according to the current leverage
to make judgments.
4 A SUMMARY AND
SUGGESTION ON THE
TIMING OF CORPORATE
DEBT FINANCING
4.1 A Summary of the Timing of
Corporate Debt Financing
When the enterprise wants to choose the best time in
the debt financing, must be clear about the
relationship between the leverage ratio and the target
leverage, and then consider the market timing.
According to the trade-off theory, we can know that
there is a best of its own capital structure for each
company, and not any time to start debt
financing.When there is a gap in the best capital
structure, debt financing is the best form. When
higher than the best structure is not the best model,
then the need for equity financing rather than debt
financing.
Through the above analysis, we know that only
when the current leverage leverage target in the
vicinity, to choose the appropriate market
opportunity to obtain greater returns is very feasible,
because this caused the loss of leverage is far lower
than the income.
With the development of the financing industry,
most of our country's enterprises in the financing to
make judgments more scientific and reasonable, for
example, they are accustomed to consider the impact
of target leverage ratio. But there are some
shortcomings, is the current debt market in our
country, the application of market timing is not very
sufficient, need to be further improved, this paper
also points out some phenomena and suggestions.
Although the timing factors can bring great benefits
in some time, but from the overall situation, it also
indicates that China's debt market is not very stable,
because the time factor has also brought a lot of
problems.For example, some companies use this
factor to allow more people to invest the final stock
quilt phenomenon.So China's market has a lot of
room for development, there are a lot of things that
are not real.
4.2 Relevant Suggestions based on the
Conclusions of This Paper
4.2.1 Based on the Enterprise Operator's
Point of View
First of all, business operators should be based on
the attitude of the shareholders, the company's debt
level control in a relatively reasonable range.
According to the previous research and the analysis
of this paper, our various industries have a relatively
efficient capital structure, the enterprise should try to
maintain the company's capital structure at the
effective level. The low debt ratio restricts the scale
of the enterprise, which affects the long-term
development of the enterprise, and the high debt
ratio will bring the serious burden to the enterprise
management.
Secondly, business operators should always pay
attention to the dynamics of the capital market.
China's financial industry and capital market has
been developing rapidly in recent years. It has
provided a variety of financing tools and a relatively
good financing environment for Chinese enterprises.
Business operators should be more efficient use of
capital markets and financial instruments, to
accurately grasp the market opportunities.
4.2.2 Based on the Perspective of Policy
Formulation
First of all, the government should introduce more
laws and regulations, to provide the basis for the
enterprise in the market activities.
Government departments should use their own
mandatory to take effective measures to give some
of the market is not reasonable behavior constraints
and control, the most effective way is to introduce
effective laws and regulations to restrict. Only in this
way can purify the debt market, guarantee the debt
financing of enterprises are faced with the urgent
need of enterprises, rather than those in order to
achieve the purpose of some of the enterprises.
Therefore, the relevant departments need to
gradually improve the existing laws and regulations.
Secondly, the state should pay attention to reduce
the direct intervention in the market at the same time.
Relevant government agencies, the most
fundamental job responsibility is to improve the
system of norms existing, put forward some guiding
policy, if the debt behavior intervention in the
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77

market too much in, but lost its most fundamental
role. Therefore, we should improve the operation of
government agencies, to recognize their real
responsibilities.
ACKNOWLEDGEMENTS
This research was funded by Jilin University of
Finance and Economics (Grant No. 2016B11)
REFERENCES
Guixin,Han.,2006.Selection of optimal capital structure.
Modern Management Science4:31-32.
Lanbiao,Liu.&Gongmin,Li.,2012.Chinese applicability of
market timing theory -- Empirical Analysis Based on
listed companies from 1998 to 2003. Finance And
Economics Research 11:17-28.
Zhiqiang,Wang.&Bo,Li.,2009.TPO market timing
persistent effect on corporate capital structure.
Securities Market Herald 3:69-74.
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