Growth Options Effect On Corporate Leverage

Assessing the relationship between optimal leverage and growth options,especially growth options effects on book leverage,is an essential aspect of capital structure analysis.However,existing studies of the growth options effect on leverage mainly focused on the research for developed countries,particularly in the U.S.market,where market discipline is stronger,more excellent enterprise management and managers are willing to make efficient investment decisions to maximize the value of the firm.By contrast,in this paper,the research mainly focused on the less developed markets,such as China,with weaker market discipline,more severe corporate ownership concentration and managers are often forced to consider the controlling shareholder's private interests.To this,there is a critical problem:"Will the relationship between optimal leverage and growth options still be negative and highly convex?"Main motivation of this paper is the lack of empirical evidence on the growth options effect on leverage in emerging economies.In order to better understand this effect,help us make better decisions in the firm-level capital structure,in this paper,we put forward a better empirical method to verify in countries whether the relationship between optimal leverage and growth options is negative and highly convex in countries characterized by more severe ownership concentration,such as China.We examine the growth options effect on leverage and the relationship between this effect and both insider control-ownership divergence and financial constraints,using data from nonfinancial firms in China over the period 2003-2015.As our main test variables,both the MB ratio and its inverse exponential transformation are employed as proxies for growth options,with the latter used to capture the nonlinear(convex)relation-ship between optimal leverage and growth options.We consider both static and dynamic trade-off theories using pooled ordinary least squares(OLS),fixed effects regressions,the Blundell and Bond(1998)two-step system generalized method of moments(GMM)procedure.In this paper,the empirical results with previous literature study(e.g.,Ogden and Wu,2013)show that:a strongly negative and highly convex relationship between a firm's leverage and its growth options.That is to say,the growth options reduce corporate leverage in China in a highly convex manner.In particular,this paper also found that an inverse exponential transformation of the MB ratio,as a measure of growth options,is suitable for study of the relationship and has strong explanatory power than the MB ratio for the growth options effect on leverage.In addition,the explanatory power of the inverse exponential transformation of the MB ratio is robust and reliable,based on different regression models,estimation methods and subsamples,while the MB ratio is not.Conjecture,the results confirmed our hypothesis that debt levels and the relationship between the growth options is negative correlation and highly convexity(nonlinear).In further tests,we examine the relationship between growth options and leverage under differing conditions of ownership structure and financial constraints.We find that the growth options effect on leverage is particularly strong among firms characterized by wide insider control-ownership divergence and severe financial constraints.We found strong evidence that supports this conclusion:the relationship between optimal leverage and growth options is negative and highly convex in China.This conclusion for emerging market growth options effect on leveraged research have great influence,the influence of different aspects is also helpful for enterprise capital structure further studying.