The determinants of capital structure: Evidence from China
Section snippets
Proxies for the determinants of capital structure
Theoretical and empirical studies have shown that profitability, tangibility, tax, size, non-debt tax shields, growth opportunities, volatility, and so on affect capital structure. On the relationship between these factors and companies' capital structure, Harris and Raviv (1990), summarizing a number of empirical studies from US firms, suggest that “leverage increases with fixed assets, non-debt tax shields, investment opportunities and firm size and decreases with volatility, advertising
Descriptive statistics of the determinants and leverage
This study employs the six measures of leverage shown in Table 2. Book long-term debt ratio, LD, is defined as long-term debt divided by long-term debt plus book value of equity. Book total debt ratio, TD, is defined as total debt (short-term plus long-term) divided by total debt plus book value of equity. Book total liabilities ratio, TL, is defined as total liabilities divided by total liabilities plus book value of equity. When book value of equity is replaced by market value of equity, LD,
Empirical analysis
In this section, we present the results of empirical analysis on the determinants of capital structure. As the results of OLS analysis and the Tobit model are very similar to each other, we just present and discuss OLS results for simplicity.
Table 5 reports the results of the determinants of market and book total liabilities ratios (MTL and TL).
Generally our results are consistent with the predictions of theoretical studies and the results of previous empirical studies. Profitability is
Robustness analyses
In this part, we run several robustness analyses over the determinants of leverage. First, we employ three ways to check the stability of the relationship between total liabilities ratio and the explanatory variables. Second, we report the results of OLS analysis over different measures of leverage.
Table 6 reports the results of robustness analysis on the determinants of TL and MTL.
As summarized in Table 6, we employ three ways to check the stability of the relationship between leverage and the
Conclusions
The forces working on firms' capital structure in other countries also work in a quite similar way in China. Although China is still transforming its economy from a command economy to a market economy, and the state is still the controlling shareholder for most listed companies, the factors which affect firms' leverage in other countries also affect Chinese companies' leverage in a similar way. Specifically, leverage, as measured by long-term debt ratio, total debt ratio and total liabilities
Acknowledgement
We thank Chong-en Bai, Chun Chang, Joe Lu, Keith Wong, Jack Zhang, the anonymous referee and participants in the economics and finance workshop held at the University of Hong Kong, at the conference on China and World in the 21st Century held at Hong Kong Baptist University, and at the 14th Association for Chinese Economic Studies (ACES) Annual Conference held at the University of Sydney for helpful comments and Xia Li for excellent research assistance. We also thank Tom Hughes Wilhelm at MUST
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