Can financial factors affect corporate debt leverage convergence?

Abstract

This study examines the individual and macro financial factors affecting Chinese corporations' debt leverage convergence. Based on the nonlinear time-varying factor model, this study tests the convergence of the debt leverage of Chinese A-share non-financial listed companies from 1998 to 2017, and obtains two company groups, big club and non-big club. Further study tests the influence of financial factors on Chinese corporations' debt leverage convergence. Internal funds (total return on assets, free cash flow, cash holding, cash dividend payment) and monetary policy are taken as the agent variables of individual and macro financial factors, respectively. The results show that companies lacking internal funds are more likely to converge to big club than those that have sufficient internal funds, and the debt leverage convergence of companies in big club is significantly affected by monetary policy compared with those in non-big club. This study shows that the impact of China's monetary policy on the trend of corporate debt leverage is heterogeneous. Structural adjustments must be made to its current monetary policy to maintain reasonable corporate leverage and control debt risks.