Ownership structure, economic fluctuation, and capital structure: Evidence from China

• DOI: http://doi.org/10.1002/ijfe.1694
• Date: 01 April 2019
• Published date: 01 April 2019

RESEARCH ARTICLE

Ownership structure, economic fluctuation, and capital

structure: Evidence from China

Xi Wang

1

| David Manry

2

| Gina Rosa

2

1

Better Life Commercial Chain Share Co.,

Ltd., Xiangtan, China

2

College of Business Administration,

University of New Orleans, New Orleans,

Louisiana

Correspondence

David Manry, College of Business

Administration, University of New

Orleans, 2000 Lakeshore Drive, New

Orleans, LA 70148‐1530.

Email: dmanry@uno.edu

Abstract

We investigate the influence of controlling shareholders, including governmen-

tal ownership, on the debt levels of Chinese firms during varying economic

conditions. Consistent with previous research, we find that listed firms in

China have significantly more short‐term debt than long‐term debt. We also

find that as the percentage ownership of the largest shareholder increases, less

debt (as a percentage of total assets) is generally preferred. During economic

slowdowns, firms tend to reduce their short‐term debt levels, although long‐

term debt appears to increase.

Further tests reveal that entrepreneur‐controlled firms reduce long‐term debt

during economic slowdowns, suggesting that they take into consideration the

implications of changes in macroeconomic conditions for earnings and liquid-

ity when making debt financing decisions. However, we also find that State‐

controlled firms in China tend to increase short‐term borrowing during

declines in macroeconomic conditions, consistent with the implications of

“tunneling and propping.”

KEYWORDS

capital structure, economic fluctuation,State control

1|INTRODUCTION

We investigate the capital structure choice of Chinese

firms with different levels of controlling interest and

under changing economic conditions. It is common

among Chinese firms for the controlling shareholder to

be the State, and State ownership differs from non‐State

control in important ways.

1

Most corporate debt in

China is composed of short‐term bank loans, because

the bond market is underdeveloped (Chen, 2004; Huang

& Song, 2006; Tian & Estrin, 2007). State‐owned banks

dominate the finance industry in China, and research

suggests that firms controlled by the State tend to get

preferential access to credit (Brandt & Li, 2003; Chen,

Chen, Lobo, & Wang, 2010; Fan, Wong, & Zhang, 2005;

Ruan, Cullen, Ma, & Xiang, 2014). Li, Yue, and Zhao

(2009) report that State‐controlled banks are pressured

to loan primarily to State‐owned enterprises (SOEs), with

little concern over creditworthiness.

2

Management decisions in State‐controlled firms often

appear to be driven by social concerns, rather than by

1

We refer to the government of the Peoples Republic of China as the

State and regard sample firms to be State‐controlled if shareholdings

by government departments and State‐owned enterprises (SOEs) com-

prise the largest block. Firms not controlled by the State have individ-

uals or groups of investors as the largest voting block; we refer to

these sample firms as entrepreneur‐controlled.

2

Li et al. (2009) focus on unlisted firms and note that large listed firms

are less subject to domestic institutional constraints. Other research

has reported similar findings (e.g., Allen, Qian, & Qian, 2005; Gordon

& Li, 2004).

Received: 16 February 2018 Revised: 23 July 2018 Accepted: 10 September 2018

DOI: 10.1002/ijfe.1694

Int J Fin Econ. 2019;24:841–854. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 841