Optimal capital structure: case of SOE versus private listed corporation

• Published in: Chinese management studies 2013-01, Vol.7 (4), p.604-616
• Main Author: Zhengwei, Wang
• Format: Article
• Language: English
• Subjects: Bankruptcy; Borrowing; Capital structure; Cash flow; Commercial credit; Compensation plans; Corporate taxes; Costs; Debt financing; Economic reform; Efficiency; Equity financing; Financial institutions; Friction; Hypotheses; Investments; Management science & operations; Management science/operations research; Managers; Minority set aside programs; Private enterprise; Securities markets; Stock exchanges; Stockholders; Tax rates; Tax reform; Transition economies
• ISSN: 1750-614X; 1750-6158
• DOI: 10.1108/CMS-09-2013-0169

Purpose – The purpose of this paper is to examine whether corporate ownership affects corporate capital structure. This study also seeks to find out whether there is difference in dynamics of the capital structure between these two groups of firms. Design/methodology/approach – Based on panel data of China's listed firms from 1998 to 2007, this paper employs a static empirical model to validate the difference in capital structure between these two groups of firms, and then, a dynamic empirical model is used to explore the dynamic adjustment of the capital structure. Findings – The empirical results show that there is structural difference in static capital structure between state-owned and private listed firms. Further study results tell us that the adjustment to an optimal capital structure is to be faster for the private firm than for the state-owned firm. Practical implications – The findings suggest that compared with state-owned firms, private firms face higher financial friction in financing activities, but have more incentive to adjust toward optimal capital structure to maximize the shareholders' benefit. This study offers insights to corporate managers interested in privatization, when a state-owned firm is privatized, that firm becomes subject to the disciplining forces of the market and more active to pursue maximum market value of the firm, thus the adjustment to an optimal capital structure to be faster for private firm than for state-owned firm. Originality/value – This paper for the first time looks at the influence of ownership on capital structure, from both static and dynamic perspective. And this study is helpful for regulators, and corporate managers to understand the corporate financial management behavior.