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Ownership structure, economic fluctuation, and capital structure: Evidence from China
Author(s) -
Wang Xi,
Manry David,
Rosa Gina
Publication year - 2019
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1694
Subject(s) - debt , monetary economics , economics , market liquidity , earnings , capital structure , debt ratio , shareholder , china , term (time) , financial system , macroeconomics , finance , corporate governance , physics , quantum mechanics , political science , law
We investigate the influence of controlling shareholders, including governmental ownership, on the debt levels of Chinese firms during varying economic conditions. Consistent with previous research, we find that listed firms in China have significantly more short‐term debt than long‐term debt. We also find that as the percentage ownership of the largest shareholder increases, less debt (as a percentage of total assets) is generally preferred. During economic slowdowns, firms tend to reduce their short‐term debt levels, although long‐term debt appears to increase. Further tests reveal that entrepreneur‐controlled firms reduce long‐term debt during economic slowdowns, suggesting that they take into consideration the implications of changes in macroeconomic conditions for earnings and liquidity when making debt financing decisions. However, we also find that State‐controlled firms in China tend to increase short‐term borrowing during declines in macroeconomic conditions, consistent with the implications of “tunneling and propping.”