Capital structure determinants and dynamics: A comparison of China and the United States

Sammanfattning: As of today, the academic literature has not yet provided a comprehensive analysis of capital structure determinants and dynamics in China. The following paper closes this gap by conducting a detailed empirical study on Chinese and US companies. With prior research on capital structure mainly having focused on the US market, findings for the developed economy serve as a benchmark in our study. Comparing the financing envi-ronments in the two countries, we find that capital markets and financial intermedia-tion are still less developed in China in terms of size and the degree of investor protec-tion. In light of these observations, our study examines whether firm-specific capital structure determinants and dynamics are nonetheless similar in both countries. Panel data, covering the time period from 1998 to 2012, is drawn from Compustat and Worldscope Fundamentals. We run a static OLS regression of leverage on firm-specific characteristics. Subsequently, we use the system GMM method to examine capital struc-ture adjustments over time. Indeed, we find the same firm-specific capital structure de-terminants to be significant in both countries, revealing similar effects on leverage. Whilst the size and tangibility of assets as well as median industry leverage exert a posi-tive impact, profitability is negatively related to leverage. Furthermore, we also find evidence that Chinese companies partly adjust to a target capital structure over time, similar to their US counterparts. However, given the financial constraints faced by Chi-nese companies and potentially high adjustment costs, the speed of adjustment is esti-mated to be lower than for US companies.