Determinants of Capital Structure: Evidence from China & UK Company Panel Data

Abstract

The purpose of this study is to find essential determinants in determining the capital structure. In order to find and compare the capital structure of developing countries in China and developed countries, this paper selected 730 listed companies for analysis through Shanghai A-Share and FTSE. From 2002 to 2014, the entire period selected for this study was 13 years, including a crucial period of the financial crisis that erupted in 2008. Since the data is a combination of time series and cross-section, this paper analyzes the panel data by establishing a regression model to find the determinants that influence the capital structure. The dependent variable is leverage, and the independent variables are tangibility, profitability, size, growth opportunities, non-debt tax shield, liquidity. The results of the regression show that both Chinese and British profitability, growth opportunities and liquidity have a negative correlation, and tangibility may have a positive impact on the total debt before the crisis. By comparing the results of each period, we can find that in the financial crisis, the profitability, growth opportunities and non- debt tax shield of the two countries were affected, and they changed from significant to nothing in the capital structure. At the same time, the study clearly shows that liquidity has become an essential variable in capital structure during these selected time periods.