Split-share reforms and capital structure adjustment in China: a dynamic panel fractional estimation

Abstract

PurposeThe purpose of this study is to explain the adjustment rate toward the target capital structure of Chinese nonfinancial listed firms and to investigate the impacts of the split-share reforms (2005–2006) on the capital structure adjustment rate.Design/methodology/approachThe authors control for the unobserved heterogeneity and the fractional nature of the adjustment rate by applying an unbiased dynamic panel fractional estimator on the unbalanced panel data of 27,545 firm-year observations of Chinese nonfinancial firms listed during 1998–2015.FindingsThe authors find that Chinese firms adjust at an annual rate of 19–27% to reach their capital structure targets. The authors also find a positive impact of the split-share reforms on the adjustment rates of Chinese nonfinancial firms toward their target capital structure. Split-share reforms also helped Chinese firms to increase the use of equity financing in their capital structure.Practical implicationsThe authors argue that the government should strengthen capital markets to enable easy access to more financing options so that Chinese firms can acquire cheaper external financing.Originality/valueTo the best of authors' knowledge, this is the first study that applies an unbiased dynamic panel fractional estimator on an extended data set of 27,545 firm-year observations of Chinese nonfinancial firms listed during 1998–2015.

Family ownership and speed of adjustment towards targeted capital structures: A study of ASEAN firms

“…Based on the most widely used two‐stage partial‐adjustment model for SOA (i.e., Ahsan et al, 2020; Cook & Tang, 2010; Pindado et al, 2015), the targeted capital structure () is determined by the most common firm‐level factors ( X i,t ) as identified in the capital structure literature (Ahsan et al, 2016; Dang et al, 2014; Frank & Goyal, 2009). This is depicted in the following equation:where Debt Ratio is measured by total debt divided by total assets (Cook & Tang, 2010; Devos et al, 2017).…”

“…3 1 There are costs associated with the deviation from targeted leverages, which include bankruptcy costs for overleveraged firms and losses of tax savings for underleveraged firms (Dufour et al, 2018). The speed of adjustment (SOA) towards targeted capital structure has recently received increased attention in the corporate finance literature (e.g., Ahsan et al, 2020;Dang et al, 2019;Devos et al, 2017).…”

“…Therefore, firms have the incentive to conform to their targeted capital structures (Devos et al, 2017). However, capital structure adjustment can be expensive because of higher costs of external capital and costs of capital access (Ahsan et al, 2020; Leary & Roberts, 2005; Li et al, 2017). Such adjustment costs act as the key friction that slows down firms' speed of adjustment towards their capital structure targets (Dufour et al, 2018; Hüttel et al, 2010).…”

“…Firms in general have dynamic targeted capital structures which aim to balance the benefits and costs of using debt (Harford et al, 2009), thereby maximising firm value (Cook & Tang, 2010). Due to the high costs of external financing and the difficulties of capital access, firms, however, cannot quickly adjust towards their capital structure targets (Ahsan et al, 2020; Leary & Roberts, 2005; Li et al, 2017). In this regard, the speed in which firm adjust towards their capital structure targets (SOA hereafter) can signal the efficiency of firms' financing decisions.…”

Institutional environment, the ultimate controller's characteristics and CSR disclosure in China

“…Higher index values show a faster marketization process and a better institutional environment.3.2.3 | Ultimate controller's characteristicsBefore 2005-2006, the state was the ultimate controller in most listed private firms. However, split-share reforms were subsequently introduced by the Chinese government, and the ownership composition as well as the ultimate controller's characteristics started changing from the state to others (individual or institutional control)(Ahsan et al, 2020). Therefore, this study examines two characteristics of the ultimate controller: first, the ultimate controller's type (TYPE), that is, state-owned or nonstate-owned controller and second, the UCO proportion, which is measured as the percentage value of the shares in the UCO, directly or indirectly, in a company.…”