Capital structure adjustment behaviors of Chinese listed companies: Evidence from the Split Share Structure Reform in China

Abstract

The Split Share Structure Reform (SSSR) in China aims at reducing the agency problems between state owners and non-state shareholders via conversion of state-owned non-tradable shares into tradable shares, making state-owned shares sensitive to the stock market. The premise of the paper is that these changes would promote capital structure adjustments towards target leverage to maximize firm value. The evidence supports that the Split Share Structure Reform positively affects the leverage adjustment speeds of all firms after the share conversion. The firm level evidence indicates that the firms with better corporate governance mechanism featuring lower non-tradable state ownership and independent board adjust faster, and the firms with higher growth potential and bankruptcy risk also rebalance faster than the counterparts towards the optimal leverage. Nevertheless, entrenchment effect of concentrated ownership still dominates corporate structure decisions despite the reform.