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Mean reverting leverage policy in China: theory and evidence from industrial and sectorial level unit root analysis

Mean reverting leverage policy in China: theory and evidence from industrial and sectorial level... PurposeThis study aims to apply unit root test to investigate the behavior of Chinese firms toward their leverage policy. The study is based on two influential and competing theories of capital structure.Design/methodology/approachThis study applies unit root test to investigate the behavior of Chinese firms toward their leverage policy. The study is based on two influential and competing theories of capital structure. Trade off theory advocates that firms have a target level of leverage ratio and that firms try to achieve that optimal leverage ratio, whereas pecking order theory argues that firms have no target level of leverage and that they follow a specific pattern of leverage. For this purpose, this study applies a Fisher type unit root test to 12,808 firm level observations. The data are unbalanced and cover a period from 1991 to 2014.FindingsThe results reveal the presence of a stationary behavior across short-term, long-term and total leverage policies. For short-term leverage policy, 21 per cent firms show stationary behavior, while for long-term, 20 per cent show a targeting behavior; for the total leverage policy 17 per cent of firms are found to follow a tradeoff model. To make the findings more interesting sample was further classified into profit and loss making firms. The study finds that loss making firms do not follow a target level of leverage in China. Furthermore, unit root is applied to all firms before and after crises-2008. It is revealed that stationary behavior is more prevalent before crises-2008.Originality/valueThis study is highly important from the point of view that it quantifies firms into distinct categories of following specific model of capital structure. To the best of the author’s knowledge, the findings of this study add to current research knowledge about Chinese firms with respect to adjustment behavior toward a target capital structure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asia Business Studies Emerald Publishing

Mean reverting leverage policy in China: theory and evidence from industrial and sectorial level unit root analysis

Journal of Asia Business Studies , Volume 12 (3): 17 – Aug 6, 2018

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1558-7894
DOI
10.1108/JABS-10-2016-0138
Publisher site
See Article on Publisher Site

Abstract

PurposeThis study aims to apply unit root test to investigate the behavior of Chinese firms toward their leverage policy. The study is based on two influential and competing theories of capital structure.Design/methodology/approachThis study applies unit root test to investigate the behavior of Chinese firms toward their leverage policy. The study is based on two influential and competing theories of capital structure. Trade off theory advocates that firms have a target level of leverage ratio and that firms try to achieve that optimal leverage ratio, whereas pecking order theory argues that firms have no target level of leverage and that they follow a specific pattern of leverage. For this purpose, this study applies a Fisher type unit root test to 12,808 firm level observations. The data are unbalanced and cover a period from 1991 to 2014.FindingsThe results reveal the presence of a stationary behavior across short-term, long-term and total leverage policies. For short-term leverage policy, 21 per cent firms show stationary behavior, while for long-term, 20 per cent show a targeting behavior; for the total leverage policy 17 per cent of firms are found to follow a tradeoff model. To make the findings more interesting sample was further classified into profit and loss making firms. The study finds that loss making firms do not follow a target level of leverage in China. Furthermore, unit root is applied to all firms before and after crises-2008. It is revealed that stationary behavior is more prevalent before crises-2008.Originality/valueThis study is highly important from the point of view that it quantifies firms into distinct categories of following specific model of capital structure. To the best of the author’s knowledge, the findings of this study add to current research knowledge about Chinese firms with respect to adjustment behavior toward a target capital structure.

Journal

Journal of Asia Business StudiesEmerald Publishing

Published: Aug 6, 2018

References