Macroeconomic risks and capital structure adjustment speed: The Chinese evidence

Abstract

Using both integrated and two‐stage dynamic partial adjustment capital structure models, we find evidence that macroeconomic conditions affect Chinese firms' capital structure adjustment speeds towards target leverage. Chinese firms revert towards target leverages faster in high economic growth states than in low economic growth states as measured by bond and stock market capitalization relative to GDP, banking sector development, real interest rate and risk premiums. Overall, firms that are financially unconstrained, of large size, and those with small deviation of actual leverage from target leverage rebalance faster towards the target leverage than the counterparts. The same findings occur during high economic growth states, while variations in adjustment speeds exist among firms with different financial constraints and distance to target leverage during low economic growth states. The firms' leverage adjustment speed depends on the adjustment cost associated with added debt or debt replaced with internal funds or equity.

Influence of Company Internal Factors and Macroeconomics on Capital Structure Moderated by Firm Size

“…In times of economic downturn, companies reduce the use of debt due to increased volatility risks. As levels of economic uncertainty increase, companies may intend to improve their finances and adjust debt [14] Inflation is one of macroeconomic component affecting the capital structure. Research by Gunardi, et al [1].…”

“…Inflation will increase the amount of assets, hence increasing the overall value of fixed assets, increasing the company's guarantee ability when applying for credit [17]. GDP value influences capital structure adjustment behaviour [14]. The greater the economic development, the higher the interest of companies to utilize debt to finance their new investments [18].…”

“…GDP growth describes the improvement of a country's welfare. GDP value influences capital structure adjustment behaviour [14]. High economic growth will be followed by companies' desire to use debt to fund their new investment [18].…”

Monetary Policy, Fiscal Policy, and Capital Structure Dynamic Adjustment: Evidence from Chinese Listed Companies

“…Choe et al [20] and Boyer [21] discussed the influence of fiscal expenditure on macroeconomic aggregate demand, consumption, and enterprise investment. He [22] investigated the impact of fiscal policies on the capital structure of Chinese listed companies for the first time in China and found that the looser the national fiscal expenditure, the lower the target capital structure of enterprises, and the tighter the national financial expenditure, the higher the target capital structure of enterprises. Luo and Nie [16] believed that expansionary fiscal policy would speed up the adjustment of capital structure.…”

Determinants of Capital Structure and the Effect on Firm Value: Evidence from Indonesia

“…In addition to microeconomic internal factors, the literature also emphasizes the importance of considering macroeconomic external factors in determining the level of leverage of a firm. Various studies have underscored the significance of macroeconomic conditions in influencing firms' capital structure decisions [16,17], However, there is an ongoing debate on how to measure macroeconomic conditions in a comprehensive and concise manner [14]. According by Cook and Tang [18] Macroeconomic conditions should have significant implications for a firm's decision in setting its capital structure target.…”