The Determinants Of Capital Structure In Chinese Firm

Abstract

We study the determinants of capital structure for 650 Chinese publicly listed companies over the period from 1999 to 2004. We posit that a firm's decision on capital structure is inherently dynamic, and estimate the resulting dynamic capital structure model. The main findings of the paper are as follows: (i) Chinese firms adjust toward an equilibrium level of debt ratio in a given year at a very slow rate; (ii) firm size, tangibility and state shareholdings are positively associated with firm's leverage ratio, while profitability, non-debt tax shields, growth and volatility are negatively related to firm's leverage ratio; (iii) lagged profitability has a negligibly small and positive impact on firm's leverage ratio; (iv) for a firm experiencing a large reduction in its leverage ratio only about 11% of the discrepancy between its desired and actual leverage level is eliminated within a year (compared to more than 18% for full firm sample); (v) extending the basic model to allow for both the target level and the speed of adjustment to be endogenously determined, we find that Chinese firms tend to adjust faster if they are farther away from the equilibrium leverage level; and lastly (vi) extending the sample period to cover the earlier periods starting from 1993, when the Chinese stock markets were first developed, results in a slower speed of adjustment for firms in the below target sample.

The Determinants Of Capital Structure In Chinese Firm

Chapter I: Introduction

Motivation

At the onset of a transitional process from a planned to a market economic system, firms in China operated in an environment in which access to external finance has proven to be very limited. During this period, many so-called state-owned enterprises (SOEs) experienced soft budget constraints as they were granted generous loans from state-owned banks to improve their dismal financial conditions. This environment, coupled with a less-than-ideal legal institution and underdeveloped financial system, has hampered the growth of the capital stock, productivity levels and even the economy in China to some extent. In response to this, major reforms have been launched in China during the past two decades in order to create a more market-oriented financial system. In particular, the economy has been making a transition from a complete reliance on state-owned and collective enterprises (first in late 1980s and then in early 1990s) to a more mixed economy, where privately-owned enterprises assume an increasingly greater role in China (in particular after mid 1990s). This transformation has been accomplished through a dynamic growth of the de novo private sector and more recently through a privatization of the SOEs by reorganizing its equity structure. In the light of this development, it is of interest to inquire whether the reforms have largely succeeded in providing an incentive for firms to behave more rationally in the sense of the neo-classical firms.

This paper does not consider the effects of the reforms on the financial markets in China in general. Rather this paper focuses on Chinese publicly listed companies (PLCs) and investigates whether ...