Doctor of Philosophy
School of Accounting & Finance
Ruan, Wenjuan, Financing decision of Chinese listed companies: what are the main determinants, Doctor of Philosophy thesis, School of Accounting & Finance, University of Wollongong, 2011. http://ro.uow.edu.au/theses/3421
In a world of perfect markets without transaction costs, firms would like to finance themselves with 100 per cent debt because the interest has tax deduction benefits (Modigliani and Miller, 1963). When there are bankruptcy costs or other costs, firms have optimal capital structures that trade off the costs and benefits of debt (Wu andYue, 2009; Graham, 2003). In the real world the supply of financial resources is usually limited, especially in developing countries (Dinc, 2005; Bai et al., 2006). Research on developing nations and economic growth strongly suggests that their high growth rates cannot be maintained indefinitely without a significant reform of the banking system and the legal/financial Infrastructure (Berger et al., 2009).
China’s economy has been growing at high speed even though it has an under developed legal system and financial market (Allen et al., 2005; Zheng and Zhu,2009). China’s banking sector has been the primary source of finance for their Economy (Bailey et al., 2011). The financial system is dominated by a large but under developed banking system controlled mainly by the four largest state-owned banks (Big Four) which dominate about three-fourths of the assets of the banking industry. The newly established Shanghai Stock Exchange and Shenzhen Stock Exchange have been expanding very fast since their inception in 1990 and 1991 respectively, but their scale and importance are still not comparable to other channels of finance for the entire economy, especially the banking sector (Allen et al., 2005; Berger et al., 2009).
During the first few years after the markets opened, most listed companies came from state-owned enterprises, but later on some non-state-owned companies were also listed on the market. Even with the introduction of stock markets, debt financingis still the predominant source of external funds for China’s corporations, including listed companies. But the Chinese debt market is saddled with an undeveloped corporate bond market and dominated by the state-owned banking sector. Under this state owned bank lending environment (Firth et al., 2008), Brandt and Li (2003) empirically examined the bank discrimination problem (this refers to state-owned banks discriminating against private firms in their lending decisions), but with the pronounced economic expansion and increasing competition for funds, financing Chinese companies has now become an extrusive issue.
Except for investigating the determinants of the basic leverage ratio, which refers to the trade off between debt liability and equity financing, this study explores the detailed financing decisions ranging from debt maturity structure and bank loan financing from different types of banks, to the intermediate role of leverage ratio between managerial incentive and firm valuation in Chinese listed companies.Therefore, this thesis will consist of a three part study.
Firstly, this study examines the methods by which Chinese listed companies raised debt during a period when the bond market was under developed and the majority of commercial banks were owned by the state. The findings indicate that the type of ownership control has an impact on the debt maturity structure. Compared to privately controlled companies, state-controlled companies had greater access to long-term debt and used less short-term debt during the sample period 2001–08. The empirical results also showed that company profitability was an important concern when banks allocated loans. I found that banks were willing to offer long-term loans to companies with higher profitability, indicating that they became one more party of de facto monitors of listed companies during China’s transition process. However, although the financial reform process has increased the motivation of banks to consider company profitability in their lending decisions, the effect of profitability on debt maturity structure was weakened when the type of ownership control was considered.
Secondly, this study investigated the determinants of financial contract from a sample of bank loans to Chinese listed firms from 1996 to 2009. The empirical results showed that political connection and institution development were the significant determinants of bank loan financing. I also found that companies’ channels of bank loans were different when I classified the banks into the Big Four, other commercial banks, policy banks, and foreign banks. Under a state-owned bank lending environment, firms controlled by the state can easily get loans from state-owned commercial banks and policy banks, while privately controlled companies get a significantly better access to loans from foreign banks.
Thirdly, in the context that capital structure can be an intermediate role, this study examined the influence of managerial ownership on firm performance through the choice of capital structures, using a sample of China’s privately controlled firms listed on the Chinese stock market from 2002 to 2007. The empirical results of the random effect model show a non-linear relationship between managerial ownership and firm value. Managerial ownership drives the capital structure into a non-linearshape, but in an opposite direction to the effect that managerial ownership has on firm value. The results of simultaneous regressions suggest that managerial ownership affects capital structure, which in turn affects firm value. These findings imply that the “interest convergence” and “entrenchment” effects of managers’ behaviour in terms of managerial ownership can also explain the agency-relevant situation of China’s privately controlled firms.
Overall, this study contributes new evidences obtained in the transformation economy of China to the literatures of capital structure, agency problem and political intervention. The traditional trade off theory (Modigliani and Miller; 1958, 1963) and Pecking order theory (Myers and Majluf, 1984) cannot explicitly observe in the new emerging market of China due to the domination of state ownership in many companies and banking sector. State ownership and political connection play an important role in determination of firms’ debt maturity structure. The relationship between firm value and managerial ownership has been detected, which shows that the agency problem is still prevalent in a country with the emphasis of state ownership and political control.