Capital Structure,Ownership Type And Firms' Product-Market Competitive Behaviors

As one of the most important financial policies of the modern enterprises, capital structure decision has impact on not only enterprises' cost of capital, financial risk, tax expenditures and governance structure, but also their competitive behaviors and performance in product markets. However, theories about interactions between capital structure and product markets have not yet attracted enough attention, waiting for further exploration.The institutional background of China's transitional economy may make the problem of how capital structure influences firms'product-market competitive behaviors become more complicated. The dominant theories of interactions between capital structure and product markets, including deep pocket effect models and two-stage switching cost models, hold that increases in firm leverage tend to soften product-market competition, which means.debt financing makes a firm's product-market competitive behaviors become softer (for example, increasing price, decreasing investment, reducing output). Most of the empirical results from western developed countries support this view. However, it seems that this view is difficult to explain the phenomenon common in China's business reality, which is, on one hand, lots of non-state-owned firms lose in product markets because of their heavy debt burden, on the other hand, many state-owned firms with huge debt do not become softer in product markets, and some even become more aggressive. In recent years, there is such phenomenon in industries including real estate, coal, cement, steel, aviation and so on.The above phenomenon indicates that the special institutional background of China may make the relationship between firms'capital structure and product-market competitive behaviors different from dominant theories and empirical results from western countries. In particular, there may be significant differences between state-owned firms and non-state-owned firms. This study attempts to analyze the effect of capital structure on product-market competitive behaviors, and the influence of ownership type, based on theories about interactions between capital structure and product markets and the institutional background of China. This study chooses real estate industry to make an empirical analysis. In the real estate industry, the difference of relationships between capital structure and product-market competitive behaviors between state-owned firms and non-state-owned firms is typical; firms'ownership type is important; there is unique data (such as land auction data) suitable for a multi-level examination. Moreover, the market structure of real estate industry is consistent with theoretical models.The main contents and conclusions of this study are as follows:Firstly, through the analysis of relevant theories and the institutional background, it indicates that the dominant view of "Firm debt tends to soften product-market competition" is more consistent with non-state-owned firms than state-owned firms, due to the soft budget constraints and weak financing constraints of state-owned firms. When explaining how capital structure influences product-market competitive behaviors, deep pocket effect models and two-stage switching cost models hold that increase in firm debt would significantly improve a firm's financial vulnerability, its marginal cost of external financing and bankruptcy risk, and so softer product-market competitive behaviors. However, the soft budget constraints and weak financing constraints make this view inconsistent with state-owned firms. On the contrary, it is quite consistent with the reality of non-state-owned firms.Secondly, the theoretical analysis shows that non-state-owned real estate firms' debt would make their product-market competitive behaviors softer, because increase in debt would significantly improve their financial vulnerability, their marginal cost of external financing and the risk of bankruptcy, so the softer product-market competitive behaviors. On the contrary, state-owned real estate firms' debt would make their product-market competitive behaviors more aggressive, the reason is as follows:due to the soft budget constraints and weak financing constraints, state-owned firms can get loans from banks more easily, and expect that the government would rescue them when they are in trouble (especially for the real estate industry which is treated as a basic and pillar industry), which means their loss would be undertaken by the government and banks, the higher the firm leverage, the lower the proportion of loss undertaken by state-owned firms. As a result, state-owned firms with high leverage are more likely to adopt aggressive product-market competitive behaviors (e.g., to increase investment and buy land at a high price).Thirdly, the empirical study of listed real estate firms' investing activities shows that the negative effect of state-owned firms' debt on their own investment spending is significantly weaker than that of non-state-owned firms. Specifically, non-state-owned firms' debt has significant negative effect on their own investment spending, while state-owned firms' debt has significant positive effect on their own investment spending.Fourthly, the empirical study of real estate firms' commercial residential land auction shows that the negative effect of state-owned firms' debt on their bid in land auction is significantly weaker than that of non-state-owned firms. Specifically, non-state-owned firms' debt has significant negative effect on their bid, while state-owned firms' debt has significant positive effect on their bid.Lastly, the empirical study of real estate firms' market share growth shows that during the period when housing market generally in short supply (except year 2008), non-state-owned firms' debt has significant negative effect on their market share growth, while state-owned firms' debt has significant positive effect on their market share growth, which decrease significantly in the housing market recession (year 2008). The above three empirical studies provide evidence from various angles and at different levels for the following view:The effect of a real estate firm's debt on its product-market competitive behaviors depends on its ownership type. For non-state-owned real estate firms, debt would make their product-market competitive behaviors softer; while for state-owned real estate firms, debt would make their product-market competitive behaviors more aggressive.Academic value of this study is mainly concentrated in the following four points:Firstly, this study analyzes the effect of capital structure on product-market competitive behaviors in the institutional background of China, and points out the important influence of ownership type. It indicates that the dominant view of "Firm debt tends to soften product-market competition" is more consistent with non-state-owned firms than state-owned firms, due to the soft budget constraints and weak financing constraints of state-owned firms.Secondly, this study examines the effect of capital structure on product-market competitive behaviors from various angles and at different levels. It provides reliable evidence from aspects of investment and land auction as well as market share growth, using data from the real estate industry.Thirdly, this study examines the effect of capital structure on firms'bid in land auction, and points out the important influence of ownership type, which provides important empirical evidence for the theory of auction with budget constraints.Fourthly, this study discusses the impact of bidders'capital structure on land transaction price, helps to understand the land price formation process from the micro perspective of auction.Besides, findings of this study help to understand the phenomenon such as high land prices and fast-growing state-owned firms in China's real estate industry, which could benefit housing market regulation and bank credit management.