Financial integration and capital structure decisions of listed firms: evidence from China

Abstract

PurposeThis paper investigates the impact of financial integration on the capital structure of the firms operating in mainland China, examining the firm-level and country-level integrating variables for 2,878 listed Chinese firms over the period of 1991–2016 in regard to the firms' capital structures. Finally, the study revisits the associations for the state-owned and multinational firms in the context of China.Design/methodology/approachA large sample of unbalanced data from firms were used to explore the relationship firm-level and country-level integrating variables has with firm leverage and maturity; this is accomplished using the fixed effect model. For robustness, a system-generalised method of moments was used.FindingsThe results indicate that internationalisation positively impacts the leverage and debt maturity of all listed Chinese firms and multinational firms and that state-owned firms are financed mainly by the state. For country-level integration, the authors find that credit and equity markets are negatively related to a firm's leverage. A negative relation with credit markets suggests that Chinese firms have much cheaper financing options than the benefits that arise from credit market integration. Moreover, the effect of equity market integration is more pronounced on Chinese firms' capital structure and debt maturity than credit market integration.Practical implicationsThe results provide valuable implications of financial integration for policymakers as well as capital structure decision-making for managers in China.Originality/valueFew studies have examined the impact of integration on firms' capital structures in developing countries. After controlling for unobserved heterogeneity and endogeneity, this study adds new multilevel integration evidence on the capital structure of Chinese firms.