What determine firms’ capital structure in China?

Abstract

Purpose -This paper investigates the determinants of capital structure using a cross-section sample of 1481 non-financial firms listed on the Chinese stock exchanges in 2011. Design/methodology/approach -Employing four leverage measures (total leverage and long-term leverage in terms of both book value and market value, respectively), this study examines the effects of factors with proven influences on capital structure in literature, along with industry effect and ownership effect. Findings -We find that large firms favour debt financing while profitable firms rely more on internal capital accumulation. Intangibility and business risk increase the level of debt financing but tax has little impact on capital structure. We also observe strong industrial effect and ownership effect. Real estate firms borrow considerably more and firms from utility and manufacturing industries use more long-term debt despite compared with commercial firms. On the other hand, firms with state ownership tend to borrow more, while firms with foreign ownership choose more equity financing. Research limitations -The study uses cross-section data to avoid any potential time effects, which allows us to focus on our main research question -to identify the determinants of capital structure for Chinese firms. Future research may gain more insights using panel data and considering other factors such as crisis and financial reforms. Practical implications -These results may provide important implications to investors in making investment decision and to firms in making financing decisions. Originality/value -this paper uses by far the largest and latest cross-section sample from the Chinese stock markets, offering a more complete picture of the financing behaviours in the Chinese firms, with known characters and the impact of ownerships.

Impact of foreign ownership on capital structure and firm value in emerging market: case of Amman Stock Exchange listed firms

“…ROA is a proxy for profitability. It has a negative significant relationship with short term market leverage at 1%, and this result is consistent with the study of Chen et al (2014).…”

“…Size and age have a positive significant impact on LMLV at 1%, which support our assumption earlier that larger and bigger firms chose debt over equity. Owing to their capability of reaching and managing debt financing, this falls in line with Chen et al (2014), in addition to Phung and Le (2013) who suggest a positive relationship as well. Tangibility reports a positive insignificant relationship with leverage in long term.…”

“…Phung and Le, 2013), also Li et al (2009) explaining this negative relationship due to firms with high foreign owners have more financing channel because of their reputation and connections. Chen et al (2014) also find that firms with foreign ownership rely more on equity financing over debt.…”

“…According to the study of Tamimi (2011), ROA was used as a control variable to measure profitability stating that an increase in profitability due to small interest payments on debt causes a decrease in leverage. Chen et al (2014) on their study about the determinants of capital structure, find that there is a negative relationship between profitability represented by ROA with the capital structure. ROA is expected to have a negative impact on capital structure, as the study of Mishra (2011), while seeking the determinants of capital structure for manufacturing sector in India, finds that ROA is negatively related to leverage.…”

Adjustment Behaviour of Leverage in Chinese Firms: An Empirical Analysis of Overall Firms, State-owned and Non State-owned Enterprises

“…Factors which influence the capital structure of firms in developed countries are also relevant to firms in developing countries (Booth, Aivazian, Demirguc-Kunt, & Maksimovic, 2001;Chen, Jiang, & Lin, 2014), but the institutional features can lead to distinct differences (Huang & Song, 2006;Chen, 2004;Wald, 1999). For example, in the US, more than 62% nonfinancial companies raise their capital through internal financing while in China, more than 50% such firms rely on equity issuance or debt financing to raise capital (Chen, 2004).…”