China's Listed Companies Determinants Of Capital Structure And Dynamic Adjustment

Studies on capital structure provide insights on corporate finance decisions made by listed companies in China. Domestic economy is in the process of transition, whose special characteristics may cause the decision-making mechanism of Chinese listed companies to differ from that illustrated by the Western experience. The gradual improvement of domestic capital market and corporate governance may also be reflected in the dynamic adjustment of capital structures. Therefore, a study on Chinese listed companies' capital structure will enable us to complement Western theories with experience in China. Based on the data of non-financial listed companies in the A-share market from 1999-2007, this paper studies the characteristics, decision-making mechanism, and dynamic adjustment of the capital structure in China.Unlike past research, this article separates fundamental factors and institutional factors in analyzing the decision-making mechanism of capital structure. Institutional factors are taken into consideration due to special characteristics of corporate governance in Chinese companies. The result shows that, 1) the company size and fixed asset is positively correlated with the debt level, the earning power is negatively correlated with the debt level, but the tax rate has no significant impact and the impact of growth is uncertain; 2) institutional factors include concentration level of shareholders, nature of holding shareholders, and free float of shares, all of which are negatively correlated with the debt level.This article further explores the dynamic adjustment of listed companies' capital structure. The result shows that, 1) the speed of adjusting downward is higher than that of adjusting upward, indicating the transaction costs of issuing stocks are higher than debt; 2) cash flow imbalances would influence the dynamic adjustment, validating the pecking order theory; 3) trade-off theory and pecking order theory could be complementary in analyzing the capital structure adjustment.Finally, this article proposes several suggestions in order to promote capital structure to move to the optimal target, such as improving corporate governance, increasing financing channels of companies, and further developing the stock market.