Theoretical study of the debt financing structure's impact on solvency

Abstract

Debt financing is one of the main ways of external financing, and it has always been the research focus of the academic circles. However, as a new branch of the capital structure research in recent years, the relationship between debt financing structure and solvency has not drawn enough attention. Based on relevant research literatures, this paper studies the impacts of debt financing structure on solvency, identifies the observed variables, and then proposes the conceptual model and hypotheses. Beginning with the principal-agent relationship of the capital structure theory, it finds that the impact of debt maturity structure on short-term solvency is positive, while the impact of debt maturity structure on long-term solvency is negative. What's more, this paper finds out that the impact of debt type structure on short-term and the impact of debt type structure on long-term solvency are both positive. At last, it offers suggestions for the next empirical research and theoretical research.