State-owned Firms And The Dynamics Of Capital Structure

In this paper, I use a dynamic adjustment model of optimal capital structure, and panel data methodology on a sample of Chinese firms to estimate the adjustment speed of Chinese listed firms. I estimate the non-liner model and draw some conclusions as follows:(Ⅰ) The fit of the dynamic model in term of R~2 is improved substantially compared to the static model. This result indicates that the capital structure is actually in the dynamic adjustment procedure. The adjustment cost has an important effect on the adjustment procedure. It is not proper to use the static model to illustrate the capital structure.(Ⅱ) Different capital structure theories, such as the trade-off theory, agency-cost theory and signaling model, can explain some aspects of adjustment of capital structure. Which theory is at an advantage? It depends on which aspect has an advantage over the others in current institutional backgrounds. But it does not indicate that a theory has an absolute advantage over other theories. In fact, there are no conflicts among the theories.(Ⅲ) State-owned corporations have advantages in acquiring resource. It makes them adjust their capital structure more conveniently than the non-state-owned companies. But they did not use this superiority fully. Instead, they use the resource inefficiently. For example, their profitability, growing ability is lower than the non-state-owned firm's. These defects make the adjustment speed of state-owned corporations is slower than the non-state-owned firms.(Ⅳ) Because the costs of issuing bonds and debentures is higher than issuing common stocks, Chinese firms would prefer raising capital through going public to borrowing. This behavior can convey positive information to the investors. Disclosing requirements for public companies make this strategy possible and therefore, the higher marketization have the provinces, the slower of adjustment speeds are.(Ⅴ) Although the manufacturing industry needs more capital, their adjustment speed is slower than the other industries. Both their costs of debts and costs of adjustment are higher. They do not get help from the government. They have more difficulties in acquiring new capital. Public utilities can get help from the government, but their capital sources are fewer than the other industries. The adjustment speed of public utilities is the lowest among the five industries.(Ⅵ) The institutional cost of dynamic adjustment includes two parts: fixed-cost and diminishing-with-size cost. Only when Chinese listed firms' capital structure is far off from its optimal status should they feel the urgency of changing it. The adjustment speeds of Chinese listed companies are lower than those of west and other transition economics. It is because that in the West and the transition economics, the adjustment costs are mainly consisted of fixed-costs.