Capital Structure of Internet Companies: Case Study 汇报人：方艺

目录 CONTENTS 01 / BASIC INFORMATION 03 / CAPITAL STRUCTURE THEORIES 02 / RESEARCH QUESTIONS 目录 CONTENTS 03 / CAPITAL STRUCTURE THEORIES 04 / METHOD OF RESEARCH 05 / EXAMPLES OF COMPANY CAPITAL STRUCTURE ANALYSIS 06 / CONCLUSIONS

1 BASIC INFORMATION Authors Source ZHENTING LEE and SHUTING LIANG Journal of Internet Commerce, 13:253–281, 2014

Research Questions Large Internet companies usually have low debt, and small Internet companies have high debt. It was found that the trade-off theory of capital structure,pecking order theory, market timing theory, and other theories cannot individually explain a firm’s capital structure. However, they can complement each other in describing some patterns of observed behavior. A number of recommendations for capital structure theory and practice are suggested. 2

3 CAPITAL STRUCTURE THEORIES 1.Trade-Off Theory 2.PECKING ORDER THEORY Trade-off theory suggests that capital structure reflects a trade-off between the tax benefits of debt and the expected costs of bankruptcy 权衡理论认为，资本结构反映了债务的税收收益与预期的破产成本之间的权衡。 2.PECKING ORDER THEORY 优序融资理论 3.SIGNALING 4.AGENCY COST-BASED THEORIES OF CAPITAL STRUCTURE 基于代理成本的资本结构理论

4 METHOD OF RESEARCH Companies’ capital structures were analyzed using the following questions 1. What is the firm’s current debt=equity ratio? 2. Is the firm’s debt=equity ratio low or high compared with other firms at the same industry or related industries? 3. Is the firm’s current debt=equity ratio explained by the firm’s financial policy or by the current market conditions? 4. What is the firm’s optimal capital structure according to WACC (weighted average cost of capital) approach? 5. If current debt=equity ratio is different from optimal, then what factors which are not taken into consideration in the spreadsheet analysis may explain this difference?

When working on the above questions, the spreadsheet analysis was used along with capital structure theories. These theories are pecking order Capital Structure 261 theory, trade-off theory, agency cost, flexibility, and some others described in the previous section. The calculation part includes the following elements: 1. Input data; 2. Interest coverage ratios, rating of debt, default spreads, interest rates, and probabilities of default; 3. Current situation; 4. Capital structure and cost of capital calculation; and 5. Main results.

the data resource Most data about the company were found from companies’ websites, and the edumarketinsight website, for which researchers had passwords provided together with textbooks . Default spreads, risk premiums, and other information for point 2 could be found on the bondsonline website or on the Federal Reserve website Points 3–5 represent calculations. Finally, several ratios were calculated, such as D=(DþE) ratio, beta of the firm, cost of equity, cost of debt, WACC, market value of firm, and market price=share.

5.EXAMPLES OF COMPANY CAPITAL STRUCTURE ANALYSIS 1.Google 2.Yahoo! Inc 3.LookSmart 4.Rediff.com

6.CONCLUSIONS This project analyzes the financing decisions and capital structure of Internet companies and relates observed findings to the common capital structure theories.Large Internet companies usually have low debt, and small Internet companies have high debt. It would appear that the trade-off theory of capital structure, pecking order theory, market-timing theory, and other theories cannot individually determine a firm’s capital structure and their use of sources of financing accurately, but they can complement each other to help explain observed behavior

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