Capital Structure in Emerging Markets: Evidence from China

Cover Page

Cite item

Full Text

Abstract

Although corporate capital structure has been intriguing to scientists for a number of years, very little research has been conducted on the topic for companies in emerging markets. The purpose of this paper is to investigate the determinants of capital structure using a sample of 195 non-financial firms from emerging markets in 2012-2016.

 

The inclusion of a specific dataset from Chinese companies lends vital focus to this investigation and provides crucial ballast for the investigative function. The final sample contains data on 57 China companies and 90 other companies of emerging markets. Our article focusses on identifying the determinants of capital structure of Chinese companies in comparison with companies of other BRIC countries (Brazil, Russia, India), and sets out a series of hypotheses concerning capital structure with domestic and international variables. We compare and contrast our data using a series of custom evaluation models based on linear regressions.

 

The results confirm positive impact of tangibility on total debt ratio due to a high share of capital-intensive industries in the sample. It is revealed that growth rates and firm size have positive impacts on financial leverage in Chinese companies as compared to other BRIC countries, and these effects are stronger in capital-intensive industries. We illustrate how a strong negative impact of ROA has increased in recent years, and connect this phenomenon to a considerable decrease in lending rates following a large-scale stimulus program which encouraged Chinese companies to borrow money instead of relying on retained earnings. The presence of the Chinese state in the ownership structure of companies is revealed to be significant for the majority of Chinese companies, especially for the oil and gas and metallurgical sectors.

 

Our conclusions highlight the importance of government policies and special market conditions in explaining the financing behaviour of companies in emerging countries like China.  While capital structure choice varies significantly across industries, nevertheless the differences between Chinese and other BRIC companies reflect the differences in the institutional structure of financing mechanisms in countries. This research and evaluation is especially timely considering the increased focus on Chinese commercial exposure on the world stage, a tendency which is bound to increase research interest in the near future across a range of disciplines. As such, our study and our broad range of conclusions will prove invaluable for students, researchers, policymakers, and decision makers in business, commerce, politics and academia at all levels.

About the authors

V. Nazarova

National Research University Higher School of Economics

Email: nvarvara@list.ru
ORCID iD: 0000-0002-9127-1644

PhD in Economics, Researcher, Associate Professor

Russian Federation, Soyuza Pechatnikov St, 16, 190008 Saint Petersburg

A. Budchenko

LEROY MERLIN

Author for correspondence.
Email: budchenko.as@yandex.ru
ORCID iD: 0000-0002-3957-2271

Specialist

Russian Federation, Moscow

References

  1. Ding X. Asymmetric Information in Emerging Markets: Lessons from China. 2011.
  2. Delcoure N. The determinants of capital structure in transitional economies. International Review of Economics & Finance. 2007; 16(3): 400–415.
  3. Rajagopal S. The probability of capital structure theory: Do traditional models fit in an emerging economy? International Journal of Law and Management. 2011; 57(1): 53–83. doi: 10.1108/IJLMA-01-2013-0004.
  4. Manos R., Murinde V., Green C. J. Leverage and business groups: Evidence from Indian firms. Journal of Economics and Business. 2007; 59(5): 443–465.
  5. Modigliani F., Miller M. The cost of capital, corporation financing and the theory of investment. American Economic Review. 1958; 48(3): 261–297.
  6. Moyer R. C., McGuigan J. R., Kretlow W. Contemporary Financial Management. 2006. 10th ed., South-Western Pub, Cincinnati, USA.
  7. Gitman L. Principles of Managerial Finance. 2007. 10th ed., Addison Wesley, New York, USA.
  8. Scott D. M., Petty J., Keown A. Basic Financial Management. 2000. 8th ed., Prentice Hall, New Jersey, USA.
  9. Simerly R., Li M. Environmental dynamism, capital structure and performance: a theoretical integration and an empirical test. Strategic Management Journal. 2000; 21: 31–49.
  10. Booth L., Aivazian V., Demirguc-Kunt A., Maksimovich V. Capital structures in developing countries. The Journal of Finance. 2001; 56: 87–130.
  11. Bhaduri S. Determinants of capital structure choice: a study of the Indian sector. Applied Financial Economics. 2002; 12: 655–665.
  12. Kumar S., Colombage S., Rao P. Research on capital structure determinants: a review and future directions. International Journal of Managerial Finance. 2017; 13(2): 106–132.
  13. Pandey I. Financial Management. 1999. 8th ed., Sangam Books Ltd, New Delhi, India.
  14. Abor J. Determinants of Capital Structure of Ghanaian Firms. African Economic Research Consortium Paper. 2008; 176: 1–29.
  15. Mitton T. Why Have Debt Ratios Increased for Firms in Emerging Markets? European Financial Management. 2008; 14(1): 127–151.
  16. Nivorozhkin E. Capital Structures in Emerging Stock Markets: The case of Hungary. The Developing Economies. 2002; 40(2): 166–187.
  17. Ivashkovskaya I., Solntseva M. Capital structure choice in BRIC: do Russian, Brazilian and Chinese firms follow pecking order or trade-off logic of financing? GBATA 11th International Conference, Prague, Czech Republic, 2009, pp. 572–579.
  18. Ivashkovskaya I., Makarov P. Are the classical concept of structure selection capital in emerging markets? Empirical analysis of companies in Eastern and Central Europe. Corporate Finance. 2010; 3(15): 47–62.
  19. Tong G., Green C. J. Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies. Applied Economics. 2005; 37(19): 2179–2189.
  20. Alani M. K., Alamri M. S. The determinants of capital structure: an empirical study of Omani listed industrial companies. Business: Theory and Practice. 2015; 16(2): 159–167.
  21. Acaravci S. K. The determinants of capital structure: evidence from the Turkish manufacturing sector. International Journal of Economics and Financial Issues. 2015; 5(1): 158–171.
  22. Rahim N., Saad N. Sustainable Growth of Public Listed Companies (PLC) Using Capital Structure Choices and Firm Performance in an ASEAN Market. 2014. Proceeding of the Global Summit on Education GSE, 4–5.
  23. Haron R. Key factors influencing target capital structure of property firms in Malaysia. Asian Social Science. 2014; 10(3): 62–69.
  24. Fama E., French K. R. Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Studies. 2002; 15: 1–33.
  25. Kemsley D., Nissim D. Valuation of the debt tax shield. The Journal of Finance. 2002; 57(5): 2045–2073.
  26. Baker M., Wurgler J. Market timing and capital structure. Journal of Finance. 2002; 57: 1–32. doi: 10.2139/ssrn.267327.
  27. Vo X. V. Determinants of capital structure in emerging markets: Evidence from Vietnam. Research in International Business and Finance. 2017; 40: 105–113.
  28. Clark B., Francis B., Hasan I. Do firms adjust toward target capital structures? Some international evidence. Working paper. 2009. Retrieved from http://ssrn.com/abstract=1286383.
  29. Kokoreva M. Choice of the capital structure of the companies in the BRIC countries and Eastern Europe: an empirical analysis. Corporate Finance. 2012; 6: 58–70.
  30. Huang G., Song F. The Determinants of Capital Structure: Evidence from China. China Economic Review. 2006; 17: 23.
  31. Chen J., Jiang C., Lin Y. What determine firms’ capital structure in China? Managerial Finance. 2014; 40(10): 1024–1039.
  32. Chen J. Determinants of capital structure of Chinese-listed companies. Journal of Business Research. 2004; 57(12): 1341–1351.
  33. Zhang T. The problems and causes of capital structure within Chinese listed firms. Journal of Yunnan University. 2008; 3(1): 13–16.
  34. Sun Q., Tong W. H. China share issue privatization: the extent of its success. Journal of Financial Economics. 2003; 70(2): 183–222.
  35. Liu Q., Tian G., Wang X. The effect of ownership structure on leverage decision: new evidence from Chinese listed firms. Journal of the Asia Pacific Economy. 2011; 16(2): 254–276.
  36. Li K., Yue H., Zhao L. Ownership, institutions, and capital structure: Evidence from China. Journal of Comparative Economics. 2009; 37: 482.
  37. Li H., Cui L. Empirical Study of Capital Structure on Agency Costs in Chinese Listed Firms. Nature and Science. 2003; 1(1): 46.
  38. Cespedes J., Gonzalez M., Molina C. Ownership and capital structure in Latin America. Journal of Business Research. 2010; 53: 250.
  39. De Jong A., Kabir R., Nguyen T. Capital structure around the world: The roles of firm- and country-specific determinants. Erasmus Research Institute of Management. 2007; 53: 30.
  40. Chen K., Wei J. Disclosure, Corporate Governance, and the Cost of Equity Capital: Evidence from Asia’s Emerging Markets. 2003. Hong Kong: Hong Kong University, p. 170.
  41. Emerging Markets: Group Statistics. NationMaster. Retrieved from http://www.nationmaster.com/country-info/groups/Emerging-markets.

Supplementary files

Supplementary Files
Action
1. JATS XML

Copyright (c) 2020 Nazarova V., Budchenko A.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.