Post-crisis era", Empirical Research of financing preferences for China Agricultural Listed Companies

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1 Post-crisis era", Empirical Research of financing preferences for China Agricultural Listed Companies Luo Huawei Associate professor, College of Economics and Management, Sichuan Agricultural University, Chengdu, China.(611130). Yang Jian Master, College of Economics and Management, Sichuan Agricultural University,Chengdu, China (611130). Unit: Economics & Management School of Sichuan Agricultural University Add: ,No. 211, Huiming Road, Gongping Town, Wenjiang Area, Chengdu Branch Campus of Sichuan Agricultural University, Chengdu City, Sichuan Province Post Code: Abstract As the post-crisis times comes, listed companies face more serious financing difficulties. Research of listed companies financing preference has increasingly become a research hotspot. This paper has selected a total of 48 agricultural Shanghai and Shenzhen listed companies in the Selecting the relevant financial data is to observe the financing behavior of China's agricultural listed companies. The results show that China's agricultural listed companies have financing preference. In order to analyze financing preference of agricultural listed companies, this paper uses the logistic regression model to analyze the relevant factors. Selecting the sensitive factor for the agricultural listed companies reflects financing advice. Keywords: China's agricultural listed companies; Financing preference; Factors;Logistic regression analysis of factors 1.Introduction Katz, Samuel(1969) states a preference for "some sort of financing" as necessary "for an efficiently functioning Atlantic economic community under a regime of fixed rates". Kennedy, Frank (1972) Focuses on the requirements in creating security interests in the United States. Application of policies with federal and state legislation; Preference of financing inventory and account receivable policy; Expectations on the enforcement of security interest.. Hittle, Linda C.Haddad, Kamal.(1992) Presents a survey of over-the-counter firms which seem more likely to experience asymmetric information than Fortune 500 firms. Relationship of pecking-order theory to the existence of asymmetric information; Managers of OTC firms as more likely to follow a pecking order; Capital structure theories; Importance of pecking-order models.. Akyüz, Kadri Cemil; Akyüz, İlker; Serіn, Hasan; Cindik, Hicabi(2006) aims to explore the capital structure and financing preferences of MSMS firms owners and focuses more narrowly on the debt vs. equity preferences revealed in the initial and ongoing financing of MSMS firms in forest products industry. Osei-Assibey, EricBokpin, Godfred A.Twerefou, Daniel K(2012) argues the findings further reveal that, microentrepreneur's and MSE's-specific level socio-economic characteristics such as owner's education or financial literacy status, households tangible assets, ownership structure, enterprise size, as well as sensitivity to high interest rates in the credit market, to be important determinants of either past (start-up), present or future financing preference. After the 2008 financial crisis s outbreak, the global economy has been hit. The world's major economies have suffered huge losses. And economic development rate is recession. After a series of economic stimulus package of many countries from the second half of 2009, despite the global unemployment rate is still high, but gradually the confidence of the economic has recovered. A variety of economic indicators have been picked up, industrial production begins to pick up the actual and indicators of financial market returns to normal. The COPY RIGHT 2012 Institute of Interdisciplinary Business Research 29

2 consumer s confidence is increasing and economic growth is expected to increase. So global economic has steped from the financial crisis into the "post-crisis times". After the arrival of "post-crisis times", international market began to decline. Raw material price and labor cost is rising with the appreciation of the RMB and adjustment of the export tax rebate policy. Many China's large enterprises have capital chain tension and the plight of the slow return of funds, which is resulting bankruptcy of many companies. This situation caused a serious lack of funds of many companies. Many enterprises demand for more funds. In the "post-crisis times", Chinese enterprises are facing more serious financing difficulties. The listed companies were no exception. In this context, the research of the financing preference for the listed companies has become even more important. As the "post-crisis times" comes, the factors of the financing preference for the listed companies become a hot research. Currently, from the results of relevant research for the financing preference of listed companies it can know that China's listed companies have a strong preference for equity financing. The West's new pecking order theory is that corporate retained earnings should be retained, and debt financing, the last order is the equity financing. But there is a big difference in China. Therefore, many researchers began to study the financing preference of listed companies and analyze the relevant factors in China. Because agricultural companies have unique characteristics, the research of financing preference becomes an entry point for this study. This paper selects financial data of agriculture listed companies in 2010 as a data source and selects the relevant factors affecting financing preference for logistic regression analysis. Analyze financing preference of the agricultural listed companies and take a reasonable advice for financing model. 2.China's agricultural financing preference of listed companies 2.1Mode of financing We can know that China's agricultural mode of financing of listed companies can be divided into two categories, namely, internal financing and external financing from financing sources. The so-called internal financing Refers to that the Sources of funding is from internal sources of funds, raising the funds demand of operation. Internal financing Includes corporate depreciation and retained earnings. Its advantage is mainly that information asymmetry can be reduced and savings in transaction costs can be saved. It can be avoided with outside investors to sign the corresponding cross-terms. The so-called external financing is raising funds from outside of the enterprise. Most of that of is achieved through the financial markets. China's corporate external financing have two main ways: The first is debt financing, through banks or corporate bonds from investors. The second is the stock finance. The debt financing debt financing can be divided into indirect and direct debt financing. Indirect debt financing is bank loans. And direct debt financing comes from the stock market. Both external financing in the direct issuance of debt financing and equity financing are called as direct financing. External financing is a way of corporate finance and it is a way that the owners of the company transfer risk. Currently, China s agricultural listed companies have three main methods of financing: allotment, increasing stock and convertible bonds. The approval system under the framework is that the three modes of financing are recommended by the securities companies. And China Securities Regulatory Commission audits it. In the last, publisher and lead underwriter determine the issue size, distribution methods, the issue price. These three re-financing have the existing similarities and many differences. Allotment means giving old shareholders new shares by a certain percentage.because allotment do not involve a balance between the interests of shareholders and the operation is easy, therefore most of companies are familiar with allotment and often use allotment. The biggest advantage of allotment is that which consider the rights of existing shareholders. But there are obvious flaws that the equity is not in circulation. The most direct impact is the low efficiency of the transaction. But allotment asset are more stringent by management s. Allotment can be only used cash instead of assets. At the same time, with the continuous development of China's securities market and international practices, allotment will gradually fade out refinancing stage of history. Increasing stock includes all existing shareholders and the public sale of shares. Increasing stock better meets the market principles and better meets the company's funding requirements. But in essence compared with the allotment, it is no big difference. Just the mode of operation is different. The advantages of increasing stock have two aspects. The first, it does not pay interest. When the company has profits and enough cash, it considers whether to pay dividends or not. And the payment rate is decided by the Board of Directors. The second, the principal is not requested. When the company decides to retain profits or COPY RIGHT 2012 Institute of Interdisciplinary Business Research 30

3 sell new shares, the Board of Directors can easily control the ratio of retained profits and the increasing stock. And operating costs is lower. The disadvantages of increasing stock have four aspects: The first, after financing capital stock increases significantly. But the benefit of short-term investment projects is difficult to maintain appropriate growth. So the business performance index is often diluted and the decline. Financing may be not as good as pre-financing situation, which seriously affect the company's image and stock price. And as financing, due to equity dilution can also reduce the benefit of the old controlling shareholders. The second, the costs of financing is a higher Ratio and often is usually 5% to 10% of amount of financing. The third, the corporation should consider whether to affect the company's control of the existing shareholders. The fourth, dividends can only be used in the after-tax profits. So debt is better to get tax benefit. The full name of convertible bonds is called convertible corporate bonds. In the current domestic market, convertible bonds refers to that in certain condition it can be converted into stock.convertible bonds has properties of options and bonds. The holder of convertible bonds can choose to hold maturity and be access to get interest. They can also choose to convert into stock in a given period of time to enjoy the dividend or capital appreciation. For the investors, when the stock market is downturn, you can choose to enjoy the interest income. But when the stock market is great, investors can sell it or turn it into a stock to enjoy the benefits gained. Because convertible bonds can guarantee principal and interest income and its investors have the right to sell back, so its risk is small and investment returns may be larger. At the same time, the conversion of convertible bonds and the payment can pressure on the company's managers to force them to be careful in decision-making, efforts to improve operating performance. These factors make the convertible bonds more attractive to investors. For the listed companies, the advantages of convertible corporate bonds are very obvious. The first is the lower cost of financing. As a rule, the convertible rate of convertible bonds should not exceed bank deposit rate over the same period. If it is not converted, it is equivalent to of low interest rates equivalent to long-term bonds of low interest rate. The second is large-scale financing. Because the conversion price of convertible bonds generally is higher than the pre-release period of the average stock price. If the bond is converted, its price is higher than the stock and capital is expansion. In the same conditions, convertible bonds can raise more money than allotment and increasing stock. The third, there is less pressure on performance. An investment project s cycle often takes 3 years to 5 years. Short-term benefits may be small or not. If we take increasing stock or allotment, it was fully included in the total share capital. EPS and ROE, two key indicators is immediately diluted, the company will face great pressure to of performance. Convertible bonds are different. Convertible bonds can be turned in to stock at least until after six months. So the share capital increasing has six-month buffer. Even when it is into the convertible period, in order to avoid dilution too quickly, companies can also issue notice to arrange for conversion of frequency. In the short term, as debt investors transform the convertible bonds, corporate debt pressure will gradually decline. So the convertible bonds are more skillful. From impact on the secondary market, increasing stock, allotment, and the convertible bonds have a certain negative impact on stock prices. But the negative impact of the convertible bonds is relatively weak. 2.2Preferred features China's agricultural financing structure of listed companies showed that ratio of the source of financing is low. Some listed companies almost entirely dependent on external finance. Equity financing was significantly higher than the debt financing. And the debt financing mainly comes through borrowing, especially short-term borrowing. But the bond is very few. Agricultural financing structure of listed companies reflects the " Equity financing - Debt financing - the source of financing," the dependency order. 2.3Factors affecting the financing preference From China's actual situation, the primary factor affecting the financing preference is the policies and regulations and relevant departments of China Securities Regulatory Commission. When the secondary market is in a bull market, either issuance of new share or the convertible bonds, both of them are likely to gain market acceptance with higher prices and lower the cost. But when the secondary market remains low, you need careful consideration. In this time issuing new shares may be difficult and expensive, but allotment is relatively easy. Convertible bonds is relatively flexible. If the stock market is in a bear and in the long-term the stock is expected to go within the cattle, the investors have access to get conversion and revenue. So they are expected to be actively buying convertible bonds. If the stock market is in a bull market and tends to decline during the conversion, the investors will buy less convertible bonds for lowcost financing. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 31

4 If listed companies need urgent funding, allotment and bank loans may be a better choice because the operation is simple and efficient. If the company's capital requirements are not too urgent, you can select the appropriate mode of financing which is based on other factors and conditions. When the company needs much more funds, it should consider issuing new shares or convertible bonds. Financing costs and risks is the important factor. Although debt financing has the lower cost, but it is due to pay principal and interest. Poor company may have financial crisis even surviving the crisis, while issuing shares has no this risk. If the company s operation is not good, issuing shares will only affect image and stock price. This is why many listed companies tend to take equity financing. Project financing should consider the length of payback period. For example, a high-tech company tends to invest a project which is expected no profits in the first years. In the situation, equity financing is better options. Because it does not need to pay cash interest. After refinancing capital expands, it is a test for a listed company whether it can simultaneously increase performance. If the funds is inefficient, company performance will be diluted and the risks of listed company will appear. Profit of listed companies, dividends and other factors are also an important factor. Number of listed companies lost re-financing capacity because of low profitability. Finance theory suggests that an appropriate increase of debt ratio can reduce financing costs and improve the company's capital structure the company to maximize shareholder wealth. So it is significant that maintain an appropriate level of assets and liabilities for listed companies. Listed companies should raise debt financing because convertible bonds and bank loans will be represented by a lower debt ratio of listed companies. Credit level and corporate image in the market is the important factors of financing. The level of the company's good credit means great significance for the company's long-term development. The higher the level of corporate credit, the reputation is better, the corporate image is better, corporate can choose more modes of financing. Many potential investors pay attention to business credit image. They have the more willing to invest in companies with good credit image. Opportunity of financing is a key factor which the listed companies need to focus on to consider. Listed companies should be based on market conditions and their actual needs. And they should carefully consider the scale of funding, financing opportunities and the capacity of investors. Agricultural companies should be based on camera decision theory. Through extensive market research, understand the market conditions and analyze investors' attitude and behavior mode to choose the right time for financing. 3.Empirical Analysis 3.1 Sample Selection The article is based on "SFC industry index entries and listed companies". The data comes from the net wealth of the East wealth excluding B shares, ST or ST * and abnormal stock dat. The article picks out 48 agricultural listed A-share companies of Shanghai and Shenzhen. The article analyzes financial data of December 31 in Variable definition The dependent variable excludes issuing of shares of agricultural listed companies for the first time. Because the operating results in 2010's financing policy in 2011, so dependent variable, FP represent whether to proceed with the equity financing in the 2010 and Explanatory variables are the factors of the financing preference. I divide the agricultural market factors which are affecting the company's financing into enterprise scale, solvency, profitability, asset operational efficiency, financing costs, non-debt tax shields and ownership structure. The meaning, calculation and affecting the direction of variables are in Table 1. The empirical data includes financial statement data of 48 agricultural listed companies on December 31 in 2010 financial. From analyzing the origin of the samples, agricultural listed companies are divided into: animal husbandry, forestry, agriculture, fisheries and related services. 3.3 Descriptive Statistics The number of samples is 48. Thirty-one agricultural companies, 64.6% of the total agricultural companies have not been equity refinancing in 2010 and 2011 is 64.6%. Seventeen agricultural companies, 35.4% of the total agricultural companies have been equity refinancing in 2010 and 201. The agricultural listed companies can be divided into: animal husbandry, forestry, agriculture, fisheries and agriculture-related services. From Analysis of financing preference in different industries, the highest proportion COPY RIGHT 2012 Institute of Interdisciplinary Business Research 32

5 is animal husbandry and fishery. Their proportion of its financing were 44.44%.The Followed of them are agriculture-related services of agriculture, forestry, animal husbandry, fisheries service and 41.67% of these companies have been equity refinancing. Lower financing ratio is forestry and agriculture.its financing rates were 25.00% and 21.43%. Descriptive Statistics is Table Model Analysis Because explanatory variable, FP is the two classification variable, so the article use logistic regression model to analyze the financing preference of agricultural listed companies. FP is taken only two values 0 and 1.The conditional probability of the incident is P = P (Y = 1).There are eight factors that LN TA, LN IN and so on affect the values of FP. So I have the following logistic regression model: 8 Logit(P)=ln[P/(1-P)]=a+ b i X i +u i = 1 The article uses SPSS Statistics V17.0 to conduct logistic regression analysis. The method of logistic regression is forward wald.so variables in the Equation is Table 3. The logistic regression model: Logit(P)=ln[P/(1-P)]= IR+6.624OS Model results show that, IR and OS on the FP have a significant positive impact on the FP. It shows that the average interest rate the greater the greater the probability of equity financing. The concentration of shareholder structure higher, the greater the probability of equity financing. 4.Conclusion 4.1The cost of debt financing for agricultural listed companies have a positive impact on equity financing. If the costs of debt financing of agricultural listed companies higher, the more tendency to re-share equity financing. This is due to that higher financing costs means higher costs of debt financing for the company, agricultural listed companies are more inclined to equity financing in order to avoid high interest payments. Meanwhile, with the rising cost of debt financing, debt financing becomes more difficult for agricultural listed company. So equity financing will be more intense. 4.2Ownership structure of listed companies has a significant influence on the equity financing From the empirical point of view, in the majority of listed companies in China's current share-trading conditions, the enterprise's equity financing preference is actually equity financing preference of share controller. The Ownership concentration higher, the probability of equity financing is greater. Non-tradable shares of the shareholders driven by their owner benefit prefer equity financing. 5.Policy recommendations Empirical results of financing preference for agricultural listed companies show that companies rely mainly on equity financing, followed by debt financing, the source of financing. In other words, the enterprise has a significant dependence on equity financing. The major factors of financing preference for agricultural listed companies are major the cost of debt financing and ownership structure. Any form of financing cannot totally and absolutely be positive. The enterprise should be based on changes in the environment, take reasonable financing behavior, and constantly adjust the capital structure to develop a wide range of financing. The company takes optimal capital structure to maximize the value. The reasonable financing preference of agricultural listed companies cannot be without a perfect financial system, reasonable policy guidance and effective internal governance mechanisms. Currently agricultural listed companies have a strong preference for the equity financing. This is because that our policy is imperfect and our environment is unreasonable. Therefore, the adjustment of the internal control structure is taken as an effective way to optimize financing preference of agricultural listed companies. We can take through reasonable policy guidance and be based on maximizing the value of agricultural listed companies to achieve efficient allocation of resources. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 33

6 References: Ge Yongbo.(2007). corporate finance and financing structure of the preferred departure - based on empirical research of agricultural companies. Agricultural economy Ge Yongbo, Zhang Mengmeng(2001).corporate financing preference analysis - based on empirical data of listed companies of agriculture. East China Econ omic Management LI YiM, Liu Qingyun(2007). China's listed companies financing preference influencing factors.agricultural Economy, Liu Kairui, Mayun Yan(2011).China's real estate financing preference of listed companies in the empirical analysis of influencing factors. Fiscal and financial Peng Haolan(2009). listed companies, factors affecting the financing strategy and its re-financing options. Economic reform Zhou Yunlan, Qin Xu(2010).SME equity financing empirical analysis of listed companies. Accounting Communications Akeriof, George(1970). The Market for Lemons :Quality Uncertainty and the Market Mechanism Quarterly Journal of Economics89-90 Berger, A. N and Udell G. F(2002). Small Business Credit Availability and Relationship Lending: the Importance of Banking Organization Structure, Economical Journal. 112, Franco Modigliani and Merton H.Miller(1958). The Cost of capital, Corporation finance and the Theory of Investment, the American Economic Review,1958,Vol Stiglitz, J., Weiss, A. (1981), Credit Rationing with Imperfect Information, American Economic Review71( 3), Osei-Assibey, Eric; Bokpin, Godfred A.; Twerefou, Daniel K (2012). Microenterprise financing preferencetesting POH within the context of Ghana's rural financial market. Journal of Economic Studies, Vol. 39 Issue 1, , 22p; DOI: / KATZ, SAMUEL I(1969). The Economics of Interdependence: Economic Policy in the Atlantic Community.. Journal of Finance, Sep69, Vol. 24 Issue 4, p Kennedy, Frank (1972)R.. Secured Transactions.Business Lawyer, Apr72, Vol. 27 Issue 3, p755, 19p Hittle, Linda C.Haddad, Kamal(1992). Over-the-counter firms, asymmetric information, and financing preferences..review of Financial Economics; Fall92, Vol. 2 Issue 1, p81, 12p, 6 Charts. Akyüz, Kadri Cemil; Akyüz, İlker; Serіn, Hasan; Cindik, Hicabi. Forest Policy & Economics, Apr2006, Vol. 8 Issue 3, p , 11p; DOI: /j.forpol COPY RIGHT 2012 Institute of Interdisciplinary Business Research 34

7 Annexure Table 1. The meaning of Variables Variables Symbol meaning Affecting direction Financing Preference Enterprise scale FP Equity financing is 1. Not equity financing is 0. LNTA Natural logarithm of total assets + LNIN Natural logarithm of income - Solvency ALR Asset-liability ratio - Profitability ROE Return on Equity - Operational efficiency AT Asset Turnover - Financing costs IR The average interest rate + non-debt tax shields NTB Non-debt tax shields + ownership structure Table 2.Descriptive Statistics OS Proportion of the largest shareholder N Range Minimum Maximum Mean Statistic Statistic Statistic Statistic Statistic Std. Error FP LNTA LNIN ALR ROE AT IR NTB OS Valid N (listwise) 48 Table 3. Variables in the Equation B S.E. Wald df Sig. Exp(B) Step 1 a IR E27 Constant Step 2 b IR E35 OS Constant a. Variable(s) entered on step 1: IR. b. Variable(s) entered on step 2: OS. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 35