The determinants of capital structure: Evidence from China

doi:10.1016/j.chieco.2005.02.007

China Economic Review

Volume 17, Issue 1, 2006, Pages 14-36

https://doi.org/10.1016/j.chieco.2005.02.007 Get rights and content

Abstract

This paper employs a new database containing the market and accounting data (from 1994 to 2003) from more than 1200 Chinese-listed companies to document their capital structure characteristics. As in other countries, leverage in Chinese firms increases with firm size and fixed assets, and decreases with profitability, non-debt tax shields, growth opportunity, managerial shareholdings and correlates with industries. We also find that state ownership or institutional ownership has no significant impact on capital structure and Chinese companies consider tax effect in long-term debt financing. Different from those in other countries, Chinese firms tend to have much lower long-term debt.

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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The determinants of capital structure: Evidence from China

Abstract

Section snippets

Proxies for the determinants of capital structure

Descriptive statistics of the determinants and leverage

Empirical analysis

Robustness analyses

Conclusions

Acknowledgement

North American Journal of Economics and Finance

Journal of Financial Economics

Journal of Financial Economics

Pacific-Basin Finance Journal

Journal of Financial Economics

Journal of Financial Economics

Journal of Financial Economics

Journal of Financial Economics

Journal of Financial Economics

Journal of Financial Economics

Pacific-Basin Finance Journal

The capital structure puzzle revisited

Review of Financial Studies

Managerial entrenchment and capital structure decisions

Journal of Finance

Capital structures in developing countries

Journal of Finance

On the existence of an optimal capital structure: Theory and evidence

Journal of Finance

Efficient financing under asymmetric information

Journal of Finance

Do inside ownership and leverage share common determinants?

Quarterly Journal of Business and Economics

Optimal investment with stock repurchase and financing as signals

The Review of Financial Studies

Reputation acquisition in debt markets

Journal of Political Economy

Testing trade-off and pecking order predictions about dividends and debt

Review of Financial Studies

Agency problem and residual claims

Journal of Law and Economics

An empirical test of the impact of managerial self-interest on corporate capital structure

Journal of Finance

Corporate financial structure and managerial incentives