This paper investigated the capital structure and its determinants within Chinese companies listed on Shanghai and Shenzhen stock exchanges after the financial crisis of 2008 – between the year 2009 and 2014. It found that Chinese listed companies have decreased the leverage levels in these years, and although the determinants that were identified as reliably important before the crisis are still significant, their explanatory power has changed quite considerably.
According to the research nine of the factors used are helpful in determining the financial leverage levels: profitability, firm size, asset tangibility, quarterly exports, money supply, industry median leverage, largest shareholding, asset growth and state ownership. Of these, although profitability is still the most important one, its explanatory power seems to have decreased the most after the crisis. The firm-specific factors
remain crucial when predicting the levels of leverage, but some macroeconomic factors can contribute to a better model slightly.
Following the results of the research, it appears that Chinese listed companies do not follow any of the two capital structures introduced in Section 2, as profitability and asset growth have the effect on leverage predicted by the Pecking-order theory, while asset
The trade-off theory
Pecking order theory
Research result
Profitability Positive Negative Negative
Firm Size Positive Negative Positive
Assets tangibility Positive Negative Positive
Assets growth Negative Positive Positive
Table 13 Capital structure theories’ predictions and research results.
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tangibility and firm size have its effect predicted correctly by the Trade-off theory. As mentioned in Section 2, some dynamic trade-off theory models predict positive
relationship with the leverage and would fit Chinese market better, while assets growth has positive relationship likely due to the equity issuing restrictions specific to China. In addition, although assets growth was predicted incorrectly by the trade-off theory, it is having low coefficients relatively to the other three variables and thus could be
considered less important. Because of that it seems like a modified to account for the restrictions existing in China dynamic model of the trade-off theory would explain the behavior of Chinese listed companies better than the pecking order theory.
In the research I have also compared the capital structures of the companies listed on Shenzhen Stock Exchange and Shanghai Stock Exchange and found that some significant differences exist between the two. The significance and explanatory power of included determinants of the leverage visibly differs within the two and because of that I suggest that further studies involving Chinese listed companies also inspect this aspect, instead of only focusing on China as a whole.
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