Abstract
This study tries to investigate how firms adjust their leverage policy across the firm’s life cycle. For this purpose the study uses an extensive set of data of 867 A listed Chinese non-financial firms over a nineteen years period (1996-2014). The study employs Arellano-Bover/Blundell-Bond dynamic panel data model to estimate adjustment rate of leverage and its determinants in three different life stages of Chinese firms. We find that adjustment rate of leverage varies for different life stages. In accordance with trade off theory of capital structure this study reports a low-high-low pattern of leverage across growth, maturity and decline stage of firms’ life respectively. For total leverage, dynamic panel data reports highest adjustment rate for growing firms, followed by mature firms and firms in declining stage of their life. Both short term and long term leverage report similar pattern of leverage’s adjustment rate across the three stages of life cycle. The study provides useful insight in a unique market setting of Chinese financial markets.
Highlights
This study tries to investigate how firms adjust their leverage policy across the firm’s life cycle
From mean values of short term (SL) and long (LL) term leverage, it can be inferred that Chinese firms use more short term leverage than long term leverage
Mean value is highest for total leverage (TL)
Summary
This study tries to investigate how firms adjust their leverage policy across the firm’s life cycle. Drobetza and Wanzenried (2006) provided evidence in dividend policy variations across firm’s life cycle, and more recently, Connor and Byrne (2015) reported the influence of firm’s life cycle on corporate ur Rehman et al China Finance and Economic Review (2016) 4:19 governance This shows that corporate leverage policy should be considered for investigation under the changing life cycle of the firm so that policy makers are able to make changes in leverage policies according to changing life cycle conditions. There are studies that confirm that firm does follow a target capital structure and firms adjust their leverage to an optimal level Notable studies in this regard include studies conducted by Ahsan et al (2016a), Getzmann et al (2014), Bradley et al (1984), and Bontempi and Golinelli (2001). Our approach of multivariate firm life cycle measurement is in accordance with Ahsan et al (2016b). Ahsan et al (2016b) found different adjustment rate for growing, mature, and declining firms while analyzing a large data set of Pakistani nonfinancial firms
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