determinants of capital structure: evidence on chinese companies

Abstract

For lack of enough empirical studies on capital structure of Chinese firms and to further explore the determinants of capital structure, this thesis employs a newest dataset from year 2004 and 2005, composing of 336 firms from main board of Shanghai Stock Exchange and small and middle enterprises (SMEs) board of Shenzhen Stock Exchange to empirically study the determinants of capital structure for Chinese firms.

Based on review of relevant capital structure theories, mainly pecking order model and trade-off theory and previous empirical studies in this field from different countries, eight potential independent variables are included in the regression models and different leverage ratios of both book values and market values are used as dependent variables.

Results derived from this thesis are in line with the dominant results from previous empirical studies on Chinese firms. Identified negative determinants include profitability and non-debt tax shield. Positive determinants identified are years listed on the stock markets, size, volatility and tangibility. Results for growth opportunities are quite mixed and state-owned shares ratio is not significant. Consistent with previous studies, much lower long-term debt ratio is found for Chinese listed firms which can be explained by the small size of bond market, special role of short-term debt and the preference of equity financing over long-term loans.

For some results from this study are consistent with pecking order theory while others support trade-off models, it is difficult to say which model is more suitable in China but rather they combine together and determine the capital structures for Chinese firms.