Enterprises have the profitability of debt financing.

The relationship between profitability and debt financing risk is as follows: as an important way of enterprise financing, debt financing has financial leverage effect and tax shield effect. Financial leverage means that the debt of an enterprise increases the asset-liability ratio, and the existence of debt interest increases the degree of financial leverage, thus increasing the financial risk of the enterprise. According to the tax law, interest expenses can be deducted before tax, while dividends distributed to owners need to be.

For those who pay income tax, debt financing has a certain tax offset advantage over equity financing, which is the tax shield effect.

In order to avoid increasing financial risks and make full use of the advantages of debt financing, pecking order theory emphasized that the optimal financing order is: endogenous financing first, debt financing second, and equity financing last. Therefore, when a well-run and profitable company faces good investment opportunities, its internal funds can meet most of its financing needs without borrowing a lot of debt. However, if a company's profitability is poor and it can't meet the capital demand through internal financing, it will tend to borrow financing. This situation is more obvious in companies with financial crisis. Due to the conflict of interests between shareholders and creditors, under the condition of asymmetric information, shareholders tend to invest debt financing in risky projects, so that if the project is successful, shareholders will get residual income; If the project fails, shareholders will only bear limited liability and creditors will suffer bad debts. Therefore, the more profitable the company, the smaller the proportion of debt financing, and the less profitable the company, the more important debt financing is. Based on the above analysis, we put forward the hypothesis:

Suppose 1: the scale of debt financing is negatively correlated with profitability.