Equity Determinants in the Developing Chinese Economy

Abstract

This paper studies the determinants of Chinese SEO issuers’ equity level with explicit focus placed on the unique institutional background of China. The spurious correlation problem of the traditional model as a consequence of usage of ratio variables is addressed here. In addition, adjustments are made to the model to investigate the determinants behind current year’s managerial adjustments to equity level because equity level itself is a cumulative measure of company’s past financing policies and share price movements. The majority of SEO issuers in our sample are controlled by the state. In addition, we also found although state ownership is positively related to equity level, it is negatively related to the extent of adjustment made to equity level by SEO issuers over time. The finding indicates that despite of the priority of state controlled enterprises in access of equity, they do not issue as much equity as the other companies. No evidence is found to support the importance of corporate governance to Chinese companies’ financing behaviors, indicating that Chinese investors and companies are insensitive to the quality of corporate governance and investor protection. Furthermore, some evidences have been found for the trade-off model, the market timing hypothesis and the agency-cost-based model as theoretical explanation behind Chinese companies’ financing policies.