Can Properly Raised Debts Help Increase the Profits of Industrial Enterprises?

  • Zhang, Cheng (School of Finance and Economics, Yangtze Normal University) ;
  • Song, Li-Yuan (Dept. of Foreign Language Teaching and Research, Yangtze Normal University)
  • Received : 2017.11.24
  • Accepted : 2018.07.14
  • Published : 2019.08.31


To figure out the impact of debt financing on the profits of industrial enterprises, it starts with calculating the first differences against the logarithms of the cost profit ratios and the debt asset ratios of Chinese industrial enterprises during 179 months from 2002 to 2016; next, it runs the cointegration test and afterwards the regression test to analyze the obtained first differences, and still next uses the Simulink software to get the regularity of those changes. It finds out that there is not only a long-term stable relationship between the enterprises' profits and debts, but also a steady time series trend within a short term. The profit rate positively correlates to the debt asset ratio, and profit for the current term positively correlates to the profit for the previous term. It indicates that properly raised debts can help increase the profit rate of the industrial enterprises, and a higher previous profit level can help improve the current profit level.




Supported by : Chongqing Social Science Fund, Yangtze Normal University


  1. F. Modigliani and M. H. Miller, "The cost of capital, corporation finance, and the theory of investment: reply," The American Economic Review, vol. 49, no. 4, pp. 655-669, 1959.
  2. J. E. Stiglitz, "On the irrelevance of corporate financial policy," The American Economic Review, vol. 64, no. 6, pp. 851-866, 1974.
  3. C. W. Smith, and J. B. Warner, "On financial contracting: an analysis of bond covenants," Journal of Financial Economics, vol. 7, no. 2, pp. 117-161, 1979.
  4. S. Titman and R. Wessels, "The determinants of capital structure choice," The Journal of Finance, vol. 43, no. 1, pp. 1-19, 1988.
  5. M. C. Jensen and W. H. Meckling, "Theory of the firm: managerial behavior, agency costs and ownership structure," Journal of Financial Economics, vol. 3, no. 4, pp. 305-360, 1976.
  6. S. A. Ross, "The determination of financial structure: the incentive-signalling approach," The Bell Journal of Economics, vol. 8, no. 1, pp. 23-40, 1977.
  7. H. E. Leland and D. H. Pyle, "Informational asymmetries, financial structure, and financial intermediation," The Journal of Finance, vol. 32, no. 2, pp. 371-387, 1977.
  8. S. C. Myers and N. S. Majluf, "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, vol. 13, no. 2, pp. 187-221, 1984.
  9. R. Stulz, "Managerial control of voting rights: financing policies and the market for corporate control," Journal of Financial Economics, vol. 20, pp. 25-54, 1988.
  10. R. Israel, "Capital structure and the market for corporate control: the defensive role of debt financing," The Journal of Finance, vol. 46, no. 4, pp. 1391-1409, 1991.
  11. O. Hart and J. Moore, "Default and renegotiation: a dynamic model of debt," The Quarterly Journal of Economics, vol. 113, no. 1, pp. 1-41, 1998.
  12. R. W. Masulis, "The impact of capital structure change on firm value: some estimates," The Journal of Finance, vol. 38, no. 1, pp. 107-126, 1983.
  13. T. Vermaelen, "Common stock repurchases and market signalling: an empirical study," Journal of Financial Economics, vol. 9, no. 2, pp. 139-183, 1981.
  14. J. Xu and H. Hu, "Improvement of debt financing of enterprises in China," China Soft Science, vol. 2003, no. 6, pp. 56-60, 2003.
  15. X. Yang and X. Chen, "Corporate debt financing and product market competition," Economic Management, vol. 2004, no. 6, pp. 9-15, 2004.
  16. X. Yang and X Chen, "Analysis on the governance effect of debt financing contract," Fiscal Research, vol. 2004, pp. 53-56, 2004.
  17. H. Wu, Y. Wu, and Y. Deng, "Commission-agent relationship between the enterprise financing decisionmaking research," Numerical Economic and Technological Economic Research, vol. 2004, pp. 92-95, 2004.
  18. G. Shao and M. Wang, "An empirical study of the effects on equity structure of listed companies in debt financing," China Soft Science, vol. 2005, no. 3, pp. 61-66, 2005.
  19. Z. Zhou and S. Huang, "Enterprise incentive mechanism and financing decision analysis," Statistics and Decision, vol. 2006, no. 9, pp. 128-129, 2006.
  20. C. Wu and L. Ma, "The best capital structure of listed companies: an empirical study based on financial early warning," Economic Aspect, vol. 2007, no. 20, pp. 23-25, 2007.
  21. R. Zheng, X. Xu, and Q. He, "Shareholder arbitrage behavior and corporate financing options," Central University of Finance and Economics, vol. 2007, no. 2, pp. 32-37, 2007.
  22. Y. Dai, "An empirical analysis on the relationship between debt financing and corporate governance in China's listed companies," Journal of Hunan University (Social Sciences), vol. 25, no. 1, pp. 57-62, 2011.
  23. F. Liu and H. Lian, "The relationship between the competitive strategy in product market and financing decision," Business Economics and Administration, vol. 2012, no. 2, pp. 44-52, 2012.
  24. Y. Mu, "China's financial capital flow performance evaluation," Economic Issues, vol. 2013, no. 7, pp. 61-66, 2013.
  25. X. Song, "Ultimate controller, debt financing, and expropriation: evidence from China private listed companies," Systems Engineering - Theory & Practice, vol. 34, no. 7, pp. 1633-1647, 2014.
  26. Y. He and D. Zhang, "Management characteristics, debt financing and corporate value," Accounting Research, vol. 2015, no. 8, pp. 65-72, 2015.
  27. X. Wang, "An empirical study on debt financing and corporate performance-based on the ultimate controller's perspective," Henan Social Science, vol. 2015, no. 6, pp. 76-80, 2015.
  28. C. Wang, H. Ma, and Y. Wang, "Debt financing and equity structure of Chinese state owned enterprises-from the perspective of macroeconomic policy," Chinese Journal of Management Science, vol. 2016, no. 5, pp. 158-167, 2016.
  29. X. Huang, S. Zhu, and G. Chen, ""The effect of shareholding in financial institutions on debt financing and debt structure: evidence from listed firms," Journal of Financial Research, vol. 2015, no. 12, pp. 130-145, 2015.
  30. J. Zhu and F. Zhou, "Market share, debt financing and firm performance: empirical research on listed companies from real estate industry in China," Technical Economy, vol. 2017, no. 1, pp. 117-122, 2017.
  31. T. Chen, X. Dang, D. Jia, W. Song, and X. Han, "Dynamic coupling effect of Internet enterprise's debt financing on technical efficiency," Science Research Management, vol. 2016, no. 12, pp. 132-143, 2016.
  32. P. Tong and Z. Lu, "The relationship between debt financing and investment behavior," Accounting Research, vol. 2005, no. 12, pp. 71-76, 2005.
  33. D. Zhang, "Controlling shareholder control, debt financing and corporate investment," Securities Market Herald, vol. 2008, no. 5, pp. 69-77, 2008.
  34. J. Guo and F. Wei, "Research on debt financing, agency conflicts and enterprise investment decisions," Journal of Beijing University of Aeronautics and Astronautics (Social Sciences Edition), vol. 2008, no. 4, pp. 8-12, 2008.
  35. G. Gong and Y. Liu, "An empirical analysis of debt financing and over-investment," Seeker, vol. 2009, no. 3, pp. 18-20, 2009.
  36. X. Liu and C. Peng, "Interaction relationships of debt financing and corporate investment: on the view of bankruptcy risk," Journal of Industrial Engineering and Engineering Management, vol. 23, no. 1, pp. 104-111, 2009.
  37. H. Wu, "Research on the relationship between debt financing and investment decision of listed companies," Statistics and Decision, vol. 2011, no. 9, pp. 140-142, 2011
  38. Y. Zhao and J. Wang, "Research on the correlation between debt financing and investment scale-based on the empirical test of Chinese data from 2004 to 2009," Economic Issues, vol. 2011, no. 4, pp. 78-82, 2011.
  39. Z. Zhang, "Research on the relationship between income tax, debt financing and investment decision-making of listed companies," Statistics and Decision, vol. 2012, no. 8, pp. 186-188, 2012.
  40. N. Ma and T. Zhong, "The Research on Interplay Between Debt-financing and Over-investment Based on the Data from Listed Companies on GEM," Research on Economics and Management, vol. 2013, no. 2, pp. 72-78, 2013.
  41. Y. Zhao and J. Chen, "Executive political relations, over-investment and debt financing governance effect," Fujian Tribune (The Humanities & Social Sciences), vol. 2014, no. 3, pp. 28-32, 2014.
  42. Y. Hu and Z. Zhang, "Debt financing, uncertainty and corporate investment: empirical evidence from Chinese listed companies," Financial Economics Research, vol. 2015, no. 2, pp. 62-73, 2015.
  43. C. Peng, Y. Liu, and H. Chang, "The relationship between corporate investment and debt financing: an empirical study based on contemporaneous interactions," Journal of Yunnan University of Finance and Economics, vol. 2016, no. 6, pp. 90-102, 2016.
  44. J. Chen, "Corporate debt management risk prevention," Statistics and Decision, vol. 2004, no. 12, pp. 154-154, 2004.
  45. S. Peng, "Financial crisis early warning system construction research," Scientific and Technological Progress and Countermeasures, vol. 2003, no. 10, pp. 51-53, 2003.
  46. L. Liu, "Strengthening enterprise financial risk management," Shanxi University of Finance and Economics, vol. 2006, no. S2, pp. 197-197, 2006.
  47. Y. Li, "How to analyze the ability of enterprise solvency," Shanxi University of Finance and Economics, vol. 2006, no. S1, pp. 129-130, 2006.
  48. L. Tong, "Financial risk avoidance and control," Statistics and Decision, vol. 2007, no. 9, pp. 154-155, 2007.
  49. H. Yang, "On the financial risk management of enterprises," Statistics and Decision, vol. 2008, no. 16, pp. 174-175, 2008.
  50. N. Zhang, "The reasonable definition of enterprise asset-liability ratio," China Statistics, vol. 2008, no. 3, pp. 54-55, 2008.
  51. W. Jing, "The establishment of enterprise debt management and financial early warning system," Journal of Shanxi Finance and Economics University, vol. 2009, no. S2, pp. 207-208, 2009.
  52. J. He, "Reflections on the prevention and control of enterprise's debt management risk," Shanxi University of Finance and Economics, vol. 2009, no. S2, pp. 251-251, 2009.
  53. J. H. Sun, "Problems and countermeasures of financial management in township enterprises," Academic Exchange, vol. 2009, no. 2, pp. 110-112, 2009.
  54. Y. Li, "Discussion on enterprise debt management," Journal of Shanxi Finance and Economics University, vol. 2010, no. S1, pp. 170-170, 2010.
  55. H. Wang, "On the advantages and disadvantages of enterprise's debt management," Journal of Shanxi Finance and Economics University, vol. 2011, no. S4, pp. 62-62, 2011.
  56. Y. Chen, "The role of financial leverage in corporate financing," Journal of Shanxi Finance and Economics University, vol. 2013, no. S1, pp. 81-81, 2013.
  57. G. Jiang, "Several measures, financial and accounting measures to strengthen the risk management of hospital liability," Finance and Accounting, vol. 2014, no. 12, pp. 52-53, 2014.
  58. H. Yu and W. Chen, "Financial leverage principle and its application in the decision-making for corporate capital structure," Journal of Yunnan University of Nationalities (Social Sciences), vol. 2014, no. 2, pp. 136-139, 2014.
  59. J. Li, "Problems and countermeasures of enterprise debt financing risk management," Journal of Shanxi Finance and Economics University, vol. 2015, no. 1, pp. 112-119, 2015.
  60. Y. Li, M. Ye, and S. Xu, "The relationship between financial leverage and corporate value in Tibet listed companies," Journal of Tibet University, vol. 2016, no. 2, pp. 112-119, 2016.