Presence of Foreign Firms and the Capital Structure of Domestic Firms: Evidence from China’s Manufacturing Sector?

34 Pages Posted: 26 Aug 2013

See all articles by Sajid Anwar

Sajid Anwar

University of the Sunshine Coast - School of Business

Sizhong Sun

James Cook University - School of Business

Date Written: June 10, 2013

Abstract

Using a simple theoretical model, where presence of foreign firms leads to a positive externality to domestic firms, this paper argues that an increase in foreign presence increases the debt of domestic firms and its impact on firm investment is also positive. As foreign presence increases both debt and investment, its impact on firm leverage cannot be unambiguously determined. We explore the link between foreign presence and firm leverage by using firm level panel data from China. The empirical estimation based on the Instrumental Variable Tobit regression reveals that, in overall terms, the impact of foreign presence on the leverage of domestic firms in China's manufacturing sector is negative. We find that the negative impact on the leverage of privately owned firms is relatively large. Furthermore, the impact of foreign presence on the leverage of domestic firms varies from industry to industry.

Keywords: capital structure, presence of foreign firms, panel data analysis, China

JEL Classification: F36, G31

Suggested Citation

Anwar, Sajid and Sun, Sizhong, Presence of Foreign Firms and the Capital Structure of Domestic Firms: Evidence from China’s Manufacturing Sector? (June 10, 2013). Available at SSRN: https://ssrn.com/abstract=2314956 or http://dx.doi.org/10.2139/ssrn.2314956

Sajid Anwar (Contact Author)

University of the Sunshine Coast - School of Business ( email )

90 Sippy Downs Drive
Sippy Downs, QLD 4556
Australia

Sizhong Sun

James Cook University - School of Business ( email )

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