Leverage and Investment under a State-Owned Bank Lending Environment: Evidence from China

37 Pages Posted: 21 Dec 2008

See all articles by Michael Firth

Michael Firth

Lingnan University - Department of Finance and Insurance

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Sonia M. L. Wong

University of Hong Kong

Date Written: August 1, 2008

Abstract

This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an over-investment bias in these firms.

Keywords: Capital Structure, Investment, State Ownership of Banks and Firms, China

JEL Classification: G32

Suggested Citation

Firth, Michael and Lin, Chen and Wong, Sonia M. L., Leverage and Investment under a State-Owned Bank Lending Environment: Evidence from China (August 1, 2008). Available at SSRN: https://ssrn.com/abstract=1318457 or http://dx.doi.org/10.2139/ssrn.1318457

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Sonia M. L. Wong

University of Hong Kong ( email )

1021, KKL Building
Pokfulam Road
Hong Kong
China

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