Ownership, institutions, and capital structure: Evidence from China

• Main Authors: LI, Kai, YUE, Heng, ZHAO, Longkai
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2009
• Subjects: Foreign ownership; Leverage; Long-term debt; Marketization; Short-term debt; State ownership; Accounting; Marketing
• Online Access: https://ink.library.smu.edu.sg/soa_research/1698; https://ink.library.smu.edu.sg/context/soa_research/article/2725/viewcontent/ownership__1_.pdf
• Institution: Singapore Management University

We employ a unique data set to explore the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms. We show that state ownership is positively associated with leverage and firms’ access to long-term debt, while foreign ownership is negatively associated with all measures of leverage. Surprisingly, firms in better developed regions are associated with reduced access to long-term debt, suggesting the availability of alternative financing channels and the tightening of the lending standards under the on-going banking reform. The combination of ownership structures and institutions explains up to 6% of the total variation in firms’ leverage decisions, while firm characteristics alone explain no more than 8% of the variation. Further, we show that non-state-owned firms tend to have lower total and short-term debt than their state-owned counterparts in less developed regions. Finally, we show that state-owned firms’ easy access to long-term debt is positively associated with long-term investment and negatively associated with firm performance.