Ownership, Institutions, and Capital Structure: Evidence from China

51 Pages Posted: 18 Mar 2006 Last revised: 28 Jul 2015

See all articles by Kai Li

Kai Li

University of British Columbia (UBC) - Sauder School of Business; Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR); European Corporate Governance Institute (ECGI); Canadian Sustainable Finance Network (CSFN)

Heng Yue

Singapore Management University - School of Accountancy

Longkai Zhao

Peking University - Department of Finance

Date Written: November 2007

Abstract

We employ a unique data set to explore the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms. We show that state ownership is positively associated with leverage and firms' access to long-term debt, while foreign ownership is negatively associated with all measures of leverage. Surprisingly, firms in better developed regions are associated with reduced access to long-term debt, suggesting the availability of alternative financing channels and the tightening of the lending standards under the on-going banking reform. The combination of ownership structures and institutions explains up to six percent of the total variation in firms' leverage decisions, while firm characteristics alone explain no more than eight percent of the variation. Finally, we show that the negative effect of institutional development on firms' access to long-term debt is mitigated when the level of state or foreign ownership is high, and state ownership plays no role in foreign-controlled firms' access to long-term debt while its positive effect on access to long-term debt is strengthened for firms in well developed regions. Our evidence is consistent with state-owned banks' incentives to grant long-term loans only to state-owned firms in the absence of well-developed risk management.

Keywords: foreign ownership, leverage, long-term debt, marketization, short-term debt, state ownership

JEL Classification: G32, G15, G18

Suggested Citation

Li, Kai and Yue, Heng and Zhao, Longkai, Ownership, Institutions, and Capital Structure: Evidence from China (November 2007). Available at SSRN: https://ssrn.com/abstract=891529 or http://dx.doi.org/10.2139/ssrn.891529

Kai Li (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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Heng Yue

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Longkai Zhao

Peking University - Department of Finance ( email )

Beijing, 100871
China

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