The Dynamics Of Capital Structure: Evidence From Chinese Listed Companies

Existing empirical research on the determination of capital structure has been largely confined to the United States and a few other developed countries. In recent years, domestic studies on capital structure have been increasing. However, the focus is, empirically, on studying the association between observed leverage and a set of explanatory variables within the context of a static 'snapshot' framework due to the poor cross-sectional variation in data. Consequently, the analysis in this paper seeks to determine the dynamic nature of capital structure and its determinants for Chinese listed companies with panel data methodology, which combines cross-section and time-series information. The sample consists of 655 firms over the period of 1995 to 2002 and is drawn from a newly developed database CSMAR. The time-varying-parameter model and the partially adjustment model based on the fixed effect regression allow to analyze the changes of capital structure decisions and the adjustment processes taking place over time. The main findings of this study are that the level of profitability, tangibility, growth opportunities and the company size affects the choice of capital structure significantly, and that the relationship between the various debt ratios and the level of independent variables has changed over time. Also, the results confirm the existence of restructuring costs in attaining an optimal capital structure. What's more, the adjustment model suggests a differential cost of restructuring for long-term and short-term debt and a faster adjustment compared to the companies of developed countries. We also find that the adjustment speed has changed over time, and that the level of profitability, growth opportunities and the company size affects the adjustment speed significantly.