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 language | English |
|---|---|
| Pages (from-to) | 642-653 |
| Number of pages | 12 |
| Journal | Journal of Corporate Finance |
| Volume | 14 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - 1 Dec 2008 |
Bibliographical note
Yang Yong and Shu Haibing provided excellent research assistance. We thank Jeffry Netter (the editor) and an anonymous referee for many constructive comments and suggestions that have helped to improve significantly the quality of the paper. We also thank Simon Fan, Joe Zou, Lin Ping and Frank Song for helpful discussions and comments.Funding
We acknowledge the financial support from the Hong Kong Research Grants Council (RGC) Competitive Earmarked Research Grant Awards 2004–2005 (LU7236/04H) and a Direct Research Grant of Lingnan University (DR07B2).
Keywords
- Capital structure
- China
- Investment
- State ownership of banks and firms