The Relationship Between Product Market Competition and Capital Structure in Chinese Listed Firms

International Review of Financial Analysis, Vol. 20, pp. 41-51, 2011

29 Pages Posted: 7 Feb 2011 Last revised: 2 Mar 2011

See all articles by Yilmaz Guney

Yilmaz Guney

University of Hull

Ling Li

Central University of Finance and Economics (CUFE)

Richard J. Fairchild

University of Bath - School of Management

Date Written: February 4, 2011

Abstract

Financial and industrial economists have increasingly recognized the interaction between product market competition and financing decisions of firms. This paper analyzes the relationship between product market competition (measured by Tobin’s Q) and the capital structure of Chinese listed firms in a static and dynamic setting. We study an unbalanced panel dataset of 1'8416 firm-year observations in 12 industries from 1994 to 2006. Employing several empirical methods, this study finds that there are significant differences in the debt ratios and product market competition across different industries. Our results suggest that the relationship between leverage and product market competition is non-linear (parabolic or cubic), depending on industry type, company size and firms’ growth opportunities. The system-GMM results reveal that Chinese firms tend to adjust their leverage ratios through time. Overall, the fixed effects and GMM estimates detect a linear and inverse relationship between the intensity of competition and leverage ratio, which supports the predation theory.

Keywords: Capital Structure, Product Market Competition, Chinese Firms, Endogeneity, System-GMM

JEL Classification: G3, G32

Suggested Citation

Guney, Yilmaz and Li, Ling and Fairchild, Richard J., The Relationship Between Product Market Competition and Capital Structure in Chinese Listed Firms (February 4, 2011). International Review of Financial Analysis, Vol. 20, pp. 41-51, 2011. Available at SSRN: https://ssrn.com/abstract=1755023

Yilmaz Guney (Contact Author)

University of Hull ( email )

Hull, HU6 7RX
United Kingdom

HOME PAGE: http://https://www.hull.ac.uk/faculties/fblp/hubs.aspx

Ling Li

Central University of Finance and Economics (CUFE) ( email )

Beijing, Beijing
China

Richard J. Fairchild

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
01225 323456 (Phone)
01225 323902 (Fax)

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