LEVERAGE AND DEBT MATURITY OF CHINESE LISTED FIRMS: DETERMINANTS AND EFFECTS ON CORPORATE PERFORMANCE

Abstract

This thesis examines the determinants and effects of leverage and debt maturity on corporate performance from corporate governance perspective, making use of a large panel of Chinese listed firms over the period 2003-2010. In order to control for unobserved heterogeneity and the potential endogeneity of regressors, we use the system Generalized Method of Moments (GMM) estimator in our studies. We examine the following three main themes.
First, we examine the impact of managerial ownership and other corporate governance variables on firms’ leverage. We document that the ownership structure plays a significant role in determining leverage ratios. More specially, controlling for traditional determinants of leverage, unobserved heterogeneity, endogeneity, and persistency in capital structure decisions, we report that managerial ownership has a positive and significant impact on firms’ leverage.
Second empirical chapter is debt maturity and the effects of growth opportunities and liquidity risk on leverage. No single study has focused on this issue in the context of emerging markets. We find that the proportion of short-term debt attenuates the negative effect of growth opportunities on leverage in emerging markets, particularly in China. Additionally, we also report that the proportion of short-term debt negatively affects leverage as predicted by the liquidity risk hypothesis. When we distinguish between state owned firms and private controlled firms, we also find evidence that these effects are only relevant to private controlled firms.
Third, we examine the impact of capital structure on corporate performance. The agency theory suggests that leverage affects agency costs and thereby influences firm performance. We find clear evidence of a positive relationship between leverage and the proportion of long term debt on firms’ performance, as measured by ROA, ROS or productivity. Yet, when distinguishing between state and privately controlled firms, we find that leverage and proportion of long-term debt only affects the performance of private firms.
Our research has significant policy implications for managers, owners, potential investors and the government. First, it suggests that the Chinese government’s recent policies aimed at reforming ownership structure and encouraging managerial ownership in listed firms have been successful in providing managers with incentive to adopt risky financial choices. Further, our study extend Diamond’s liquidity risk hypothesis by showing that institutional factors (e.g. government ownership) have significant influence on the liquidity risk faced by firms when they use more short-term debt in their capital structure. Finally, our research suggests that long term debt is more effective in improving performance of listed private firms in China.
Our study recommends that while managerial ownership should be further encouraged in the state-controlled sector which helps to overcome weak managerial incentive problem faced by them, the government ownership which weakens incentive mechanisms for managers in them should be further reduced so as to enable these firms to make appropriate financial choices. The board of directors, especially independent directors do not seem to influence firms’ important decisions such as capital structure choices. Thus, our study recommends that a strong and truly independent board structure should be encouraged in the Chinese listed corporations in order to improve effectiveness of their corporate governance. Further, lenders such as banks may extend more long term credit to private sector which helps to improve performance of these firms.