Bank Loan Supply and Corporate Capital Structure: Recent Evidence from China

Abstract

This paper provides new evidence on the supply side effects on corporate capital structure in China. We find that bank-dependent firms, which are mainly large and state-owned companies in China, increase (decrease) their leverage ratios if loan supplies increase (decrease) relative to the case for small and private firms due to the inability of small and private firms to access bank loans. With their ability to substitute between different forms of capital, large and state-owned firms are relatively less (more) likely to use internal funds and equity financing when bank loans are (not) available than are small and private firms. During the credit boom in 2009 and 2010, the large and state-owned firms increase leverage ratios by 2.26% and 2.76% more than matched firms; and small and private firms are shown to decrease leverage in this period. These findings lend support to the importance of supply side effects and bank loan segmentation on capital structure decisions.

Keywords: Bank loan supply, access to bank loans, corporate leverage, financing choice, loan financing

JEL Classification: G21, G32, G38