Leverage and investment under a state-owned bank lending environment : evidence from China

Michael Arthur FIRTH, Chen LIN, Sonia M.L. WONG

Research output: Journal PublicationsJournal Article (refereed)

112 Citations (Scopus)

Abstract

This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an over-investment bias in these firms.
Original languageEnglish
Pages (from-to)642-653
Number of pages12
JournalJournal of Corporate Finance
Volume14
Issue number5
DOIs
Publication statusPublished - 1 Dec 2008

Keywords

  • Capital structure
  • China
  • Investment
  • State ownership of banks and firms

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