Adjustment Behaviour of Leverage in Chinese Firms: An Empirical Analysis of Overall Firms, State-owned and Non State-owned Enterprises

Abstract

This study investigates the adjustment behaviour and adjustment speed of Chinese firms with regards to capital structure. For this purpose, the study utilises an extensive set of data of 867 A-Listed non-financial Chinese firms over ten years from 2003 to 2012. This study adds useful insights on adjustment behaviour and speed of Chinese firms with regards to firm-specific and country level determinants of leverage policy. To find out the adjustment speed, the study uses multiple generalised method of moments (GMM) for the purpose of robustness. Both of the GMMs report positive and their adjustment coefficients are statistically significant which implies that Chinese firms follow a target level of leverage by adjusting their current leverage policy. Chinese firms take almost 3.5 years for adjustment. The analysis is extrapolated to state owned enterprises (SOEs) and non-state owned enterprises (NSOEs) and it is found that SOEs take longer time to adjust to their leverage policy as compared to NSOEs. The results are consistent for both Arellano Bond (GMM1) and Blundell and Bond (GMM2) dynamic panel data models.