determinants of corporate financial structure in China and especially to measure the ownership effects generated by state-owned, private and foreign shareholdings

1 Introduction The basic objective of any corporate capital structure study is to identify the factors that have significant influence on the determinants of firms’ leverage. Beginning from Modigliani and Miller (1958), two main types of capital structure theories are well developed: pecking order theory, which includes asymmetric information or signalling theory (Myers and Majluf, 1984); and trade-off theory, which considers agency costs (Jensen and Meckling, 1976), taxation (King, Miller, DeAngelo-Masulis, 1974, 1977, 1980), and financial distress/ bankruptcy costs. Based on these theories, a large volume of empirical studies has been done on the issue of capital structure determinants. However, both the theories and empirical studies are mainly derived using data from industrial countries and lack to explain the capital structure of firms in developing countries because distortions in these markets are more severe. China is the world’s largest developing and transaction country. Having transited from a command economy to a market economy for a dozen of years, China has different institutional structures with not only developed but also many developing countries. Chosen a state-sponsored route initially, most Chinese companies were state-owned enterprises (SOEs) before and the state still maintains its dominant right after the firms going public. However, the recent trend is that increasing non-listed state-owned shares of listed companies are privatised and marketable. Keeping the high-speed development, Chinese market attracts a great deal of foreign investment as well, so that the foreign shareholders play an increasing role in the study of capital structure of Chinese listed firms. The idea of this study is to identify the determinants of corporate financial structure in China and especially to measure the ownership effects generated by state-owned, private and foreign shareholdings. This study employs 60 Chinese listed companies and cross-sectional model to analysis the 2002 companies data. The 60 sample companies are composed by three ownership groups, 20 of each, divided in response to state-owned, private and foreign shareholdings. Six traditional explanatory variables are adopted in the study, including non-debt tax shields, tangibility, size, ACID, growth and profitability to measure whether the traditional capital structure theories---agency cost theory, bankruptcy theory and pecking order theory---work well in Chinese economy. The ownership effects are measured in the forms of state-owned, private and foreign dummy variables with 0-1 values. It is further measured as the relevant percentage figures. The rest of the paper is constructed into five parts. Section 2 selectively reviews the relevant literature on capital structure decisions and the impacts of ownership structures. Section 3 outlines the models used for running cross-sectional regressions and briefly discusses the proxies for the determinants of capital structure. In section 4 data and the relevant background of Chinese listed companies are described. Section 5 presents and discusses the empirical procedures and results. And section 6 concludes and summarises the main findings.