Dynamics Of Capital Structure Across Firm Life Cycle In Chinese Firms

The purpose of this study is to extensively analyze the dynamic adjustment of capital structure in Chinese firms across many aspects.Capital structure dynamics across firms'life cycle is one of the most significant aspects investigated by this study.Firstly,in its extensive set of analysis this study analyzes the multi-level determinants(firm,industry and country level)of capital structure and how these three tiers determinants are related to the adjustment of capital structure policy.Secondly,this paper develops some hypotheses about the adjustment model of Chiese firms' capital structure according to the analyses of some related theories.The study employs one of the most sophisticated techniques of generalized method of moments(GMM)to study the dynamic adjustment.Further this study uses the Fisher unit root testing on our panel data to study these dynamics across different capital structure theories.The main reason to use these two methods is to first measure the adjustment behavior using the GMM technique and then to quantify the no of firms following a target leverage.For this purpose the study uses an extensive set of data of 867 A listed Chinese non-financial firms over a nineteen years period(1996-2014).The study employs dynamic panel data model(System GMM)to estimate adjustment rate of leverage and its determinants in three different life stages of Chinese firms.The study finds that adjustment rate of leverage varies for different life stages.In accordance with trade off theory of capital structure this study reports a low-high-low pattern of leverage across growth,maturity and decline stage of firms' life respectively.For total leverage,dynamic panel estimation reports highest adjustment rate for growing firms,followed by mature firms and then firms in declining stage of their life.Both short term and long term leverage report similar pattern of leverage's adjustment rate across the three stages of life cycle.The firm life cycle measure in this study is based on a multivariate technique using firm' age,sales' growth and dividend payout ratio.This study applies unit root test to investigate the behavior of Chinese firms towards their leverage policy.The study is based on two influential and competing theories of capital structure.Tradeoff theory advocates that firms have a target level of leverage ratio and firms try to achieve that optimal leverage ratio,while pecking order theory argues that firms have no target level of leverage and firms follow a specific pattern of leverage.Thus if firms follow a trade off or targeting behavior,at least some companies must have amean reverting leverage to account for a stationary behavior.On the other hand if firms follow pecking order theory,their leverage should be non-stationary.Findings indicate the presence of stationary behavior and firms' inclination towards trade off model of capital structure.The trend towards trade off model decreases as we go from growth stage to decline stage.Firms in the growing stage report the highest mean reversion percentage followed by firms in the mature and decline stage.The study further extrapolates the analysis to sectorial(SOEs and NSOEs)and Industrial level.SOEs with its peculiar nature report the highest percentage of firms in decline stage which have mean reverting leverage.On the contrary NSOEs follow the overall firms with highest percentage of firms in growth stage which follow a tradeoff model.Across the industries maximum numbers of industries report a mean reverting leverage in the maturity stage.This is the first study to analyze capital structure in Chinese firms across a multivariate measure of firm life cycle.This is also a first attempt to measure the mean reversion of capital structure across firm life cycle in Chinese firmsFor short term leverage policy 21%firms show stationary behavior,for long term 20%show a targeting behavior while for total leverage policy 17%of firms are found to follow a tradeoff model.To make the findings more interesting sample was further classified into profit and loss making firms.It is found that loss making firms do not follow a target level of leverage in China.Furthermore unit root is applied to all firms before and after crises-2008.It is revealed that stationary behavior is more prevalent before crises-2008..Descriptive statistics and prior research shows that debt financing is mostly prevalent in Chinese market which may result is financial distress for Chinese firms.Bank loans are also prevalent with SOEs being given advantage while advancing loans.Securities markets are needed to be more regulated and developed in Chine to encourage equity financing.There is more reliance on short term loans as compared to long term loans.The study provides useful insight in young and unique market setting of Chinese financial markets and prevalent of bank loans in Chinese market.The study will help policy makers to increase financing options in debt abundant financial markets like China.