Abstract

There is a vast amount of literature on corporate financial policy determinants. Whereas existing studies focus on firms in developed countries, there is little work on how firms design their corporate financial policy in emerging markets. This study attempts to fill this gap by analyzing the determinants of capital structure for listed Chinese firms. We use data from Chinese public firms that were listed on two national stock exchanges during 1992-1997. These data provide us with a unique opportunity to examine the relationship of debt ratio with factors that may affect capital structure. We also study the relationship between ownership structure of equity and leverage. We find that industry classification influences the capital structure in China. Firms in more asset-intensive industry, such as manufacturing, have more leverage compared to other industries. Debt ratio has a positive relationship with firm size, proportion of tangible assets and growth rate of assets and is negatively related profitability. Evidence suggests that ownership structure is not important in explaining part of the capital structure design of listed Chinese firms. Overall, the results suggest that factors that influence debt ratio in China are similar to those in developed countries. Consistent with the evidence in developed financial markets, capital structure of listed Chinese firms is impacted by agency and bankruptcy costs.