The Determinants of Capital Structure: Evidence from Chinese Listed Companies

Abstract

This paper attempts to investigate the determinants of the capital structure of a sample of 972 listed companies on the Shanghai Stock Exchange and Shenzhen Stock Exchange in China in 2003. Various theories, namely, the trade-off, pecking order and agency theories, are deployed to explain and predict the signs and significance of each factor identified by Ragan and Zingales (1995) and Booth et al. (2001). Furthermore, we include institutional shareholdings, including state agency shareholdings, state-owned shareholdings and privately owned shareholdings, as corporate governance variables to examine the effects of corporate structure on the debt financing behaviours. As well documented, we find that profitability is negatively related to capital structure at a highly significant level. The size and risk of the firms are positively related to the debt ratio – but only in term of market value measures of capital structure. The years of the companies being listed on stock markets are positively related to capital structure, indicating the access of the firms to debt finance is more easily judged by book value. Tax is not a factor in influencing debt ratio. Ownership structure has a negative effect on the capital structure. The firms with higher institutional shareholdings tend to avoid using debt financing, a behaviour that can be explained by entrenchment effects. A further classification of the institutional shareholders reveals that, among the three groups of institutional shareholding, the state institutions, including state agency and state-owned institutions, were more averse to debt financing, particularly for state-owned institutions. There is no strong evidence indicating debt-averse behaviour by domestic institutional shareholders. Copyright Springer 2005capital structure, ownership structure, G31, G32,

Ownership and Debt Financing: Indonesia Evidence

“…The trade-off theory and the agency theory suggest a negative association between intangible assets and debt financing, while the pecking order theory implies that firms with more intangible assets confront more asymmetric information problem and thus use more debt financing. Chen and Strange [44] find positive relationship between intangibility and leverage in their study on the Chinese listed firms. Chen and Strange [44] find that intangible assets do help firms in China in confronting information asymmetry problems as intangible assets like goodwill are capable to increase borrower's access to debt in order to mitigate this problem.…”

“…Chen and Strange [44] find positive relationship between intangibility and leverage in their study on the Chinese listed firms. Chen and Strange [44] find that intangible assets do help firms in China in confronting information asymmetry problems as intangible assets like goodwill are capable to increase borrower's access to debt in order to mitigate this problem. Intangibility is measured by the ratio of intangible assets to total assets [44].…”

“…Intangible assets like copyright, goodwill, patent, trade mark, and research and development costs do have significant impact on debt financing of firms [44]. The trade-off theory and the agency theory suggest a negative association between intangible assets and debt financing, while the pecking order theory implies that firms with more intangible assets confront more asymmetric information problem and thus use more debt financing.…”

“…Chen and Strange [44] find that intangible assets do help firms in China in confronting information asymmetry problems as intangible assets like goodwill are capable to increase borrower's access to debt in order to mitigate this problem. Intangibility is measured by the ratio of intangible assets to total assets [44]. The hypothesis is that H 9 : intangibility has a positive influence on debt financing.…”

What determines leverage in Pakistan? A panel data analysis

“…Following this direct relationship is expected between age and leverage of a firm. Empirical results suggest a direct relationship between the age of a business and leverage (Chen and Strange, 2005). However, POT predicts an inverse relationship between age of a business and the leverage as older firms are relatively stable and experienced firms and have higher internally generated funds and as such require less external financing (Myers, 1984 (SBP, 1988(SBP, to 2006 to examine the variations in leverage among these firms and as such this study assumes the inherent limitations of the dataset.…”