Corporate Leverage Ratio Research Articles

The impact of digital financial development on corporate leverage ratio: The case of a-share listed non-financial enterprises in China's Shanghai and Shenzhen stock exchanges.

This study investigates the impact of digital finance on corporate leverage ratios. The study employed a large sample of China's Shanghai and Shenzhen A-share non-financial listed enterprises from 2011-2020. The study's results depict that the development of digital finance can significantly reduce the leverage ratio of enterprises. We empirically identified that digital finance affects the difference in the term structure of the corporate leverage ratio. It was found that the development of digital finance has a significant negative impact on enterprises' short-term and long-term leverage ratios. Moreover, our heterogeneity analysis shows that the negative effect of digital financial development on corporate leverage ratios is different in state-owned and non-state-owned enterprises, large-scale and small-scale enterprises, and high-leverage and low-leverage enterprises. Mechanism analysis shows that the development of digital finance can reduce corporate leverage by lowering financing costs, alleviating financing constraints, and weakening non-systemic risks. Therefore, policymakers should focus on developing and adopting digital finance by creating a supportive regulatory environment, improving access to digital financial services, and encouraging innovation in the digital finance sector. Finally, our results remain robust after addressing endogeneity issues and conducting robustness checks.

Green credit policy and corporate deleveraging: Evidence from China

Green Credit Policy (GCP) plays a dual role in environmental protection and financial regulation. Its effectiveness in driving enterprises to deleverage is of great significance in accelerating the development transition. This paper uses the difference-in-differences method to investigate the impact of the Green Credit Guidelines (GCG) on corporate deleveraging in Chinese A-share listed companies between 2007 and 2021. The results show that GCP has a driving effect on enterprise deleveraging. The mechanism tests indicate that corporate leverage ratio can be reduced by increasing financing constraints and reducing the financial distress risk. The findings offer policy implications for promoting high-quality economic development.

Local government debt and corporate tax avoidance: Evidence from China

Leveraging a large sample of publicly listed companies in China from 2010 to 2021, this study investigates the impact of local government debt on corporate tax strategies. We provide compelling evidence that the scale of local government debt is positively associated with corporate tax avoidance. In addition, we find that corporate leverage ratios, financial constraints, and debt financing costs are three plausible mechanisms underlying the relationship we identified. The tax implications of local government debt are more evident among non-SOEs, small firms, and firms in financially less-developed regions. Our key findings are robust to a battery of identification strategies. Overall, this study enriches the literature on government debt and corporate tax avoidance.

The Impact of Digital Inclusive Finance on Corporate Leverage Ratio—Evidence from Listed Companies in the SME Board of China

The Impact of Digital Inclusive Finance on Corporate Leverage Ratio—Evidence from Listed Companies in the SME Board of China

Impact of the Global Financial Crisis and the Tunisia’s Jasmine Revolution on the Corporate Capital Structure: Evidence from Four Arab Countries

This paper provides new evidence on capital structure determinants in the Arab world with special focus on the impact of the 2008 global financial crisis and the Jasmine Revolution on four different corporate leverage ratios. The sample consists of 440 non-financial listed companies from four Arab- Mediterranean countries (Egypt, Jordan Morocco and Tunisia) and the panel data are analyzed from the period 2003–2019. Statistical analysis of results are carried out by using the ordinary least squares ; three dummy variables are included (time, country and industry). The results indicate cross-country variations in four different leverage ratios. Moroccan firms, contrary to those in Tunisia and Jordan, show lower leverage ratios. By contrast, they report higher levels of « size », « profitability » and « growth opportunities ». The results also show that the Jasmine Revolution as well as the 2008 global financial crisis affects the impact of firm-specific determinants : After crisis and Jasmine Revolution, the positive and the negative effects of « size » and « profitability », respectively, become more important. Profitability is the most significant explanatory factor of corporate capital structure in Arab countries. During the two sub-periods, the growth opportunities and their negative impact on the corporate financial decisions depend on the choice of the leverage ratio (total debt versus long term debt – book values versus market values). Asset tangibility is the most critical factor : its positive effect on capital structure is more important before the Jasmine revolution and/or the global financial crisis. The effect is initially positive but becomes negative when leverage ratio is calculated using total values of debt (book and market values of debt). Results on capital structure determinants in the Arabic context not depend only on the choice of the leverage ratio, but also on the period considered.

Short-term cross-border capital flows and corporate leverage ratio: China's empirical evidence and enlightenment

In consideration of increasing global economic uncertainties and the leverage ratio of non-financial corporate sector in China reaching a historical peak, this paper uses the parallel multiple mediation model to analyze the mechanism and impact of cross-border short-term capital flows on non-financial corporate leverage in China, in which corporate borrowing and asset price are taken as mediators in parallel multiple mediation model. The research findings indicate that the influence of short-term cross-border capital flows on corporate leverage ratio in China is mainly through the direct path. The influence of the two indirect channels is relatively weak, in which the size of corporate borrowing is more influential than corporate asset price. The indirect impact of short-term cross-border capital flows on corporate leverage ratio is more significant for state-owned enterprises compared to non-state-owned enterprises.

The Impact of Corporate Leverage Ratio on Its Operating Performance: An Empirical Study Based on A-share Listed Companies on the Shanghai Stock Exchange

The Impact of Corporate Leverage Ratio on Its Operating Performance: An Empirical Study Based on A-share Listed Companies on the Shanghai Stock Exchange

Can Big 4 Auditors Increase Accounting Quality

This study investigates the relationship between the big Four auditors and accounting quality. We tested this prediction by examining a sample of A-share listed companies. The results show that the big four auditors can significantly improve the accounting quality of listed companies, while corporate leverage ratio and board size also affect the accounting quality of listed companies. The analysis also found that lower accounting quality will increase the attention of securities analysts. Listed companies should timely disclose relevant information to improve accounting quality.

The Effect of Access to the Public Debt Market on Corporate Financing Decisions: The Case of REITs

We examined the effects of access to public debt on the corporate financing decisions in real estate investment trusts (REITs) using a difference-in-differences approach and a propensity score approach. The introduction of credit ratings by S&P and Moody’s has allowed REITs to access the public debt market. To investigate the impacts of the introduction of credit ratings, we compared the financing policies in REITs with initial credit ratings before and after the introduction of credit ratings with REITs that had not obtained a credit rating between 1980 and 2016. After obtaining credit ratings, REITs have significantly increased the corporate leverage ratios and the use of long term debt, which suggest that REITs were constrained from debt financing, in particular long term debt financing, in the past until they could gain access to the public debt market after the introduction of credit ratings. Access to the public debt market has also significantly reduced both equity issuances and cash holdings. Our empirical results suggest that the introduction of credit ratings can reduce information asymmetry, and affect REITs’ capital structure decisions and the level of cash holdings.

Research on Influencing Factors of the Leverage Ratio of Non-financial Enterprises in the GBA

Abstract This paper studies the factors influencing the leverage ratio of non-financial enterprises in the Guangdong, Hong Kong and Macao Greater Bay Area (GBA) from 2007 to 2017. On the whole, the leverage ratio of non-financial enterprises in the greater bay area is not high. From the perspective of ownership, state-owned enterprises have a higher leverage ratio than non-state-owned enterprises. The leverage ratio differs significantly across industries. From the regional perspective, before 2008, enterprises in Macao had the lowest leverage ratio, and those in Guangdong had the highest. In recent years, the corporate leverage ratio has tended to be similar among the enterprises in Guangdong, Hong Kong and Macao. Corporate profitability is the most important micro-level factor affecting the leverage ratio, and economic growth has the most significant direct impact on the leverage ratio of non-state-owned enterprises. In addition, the economic growth rate, the M2 growth rate and policy uncertainty have a clear indirect impact on the leverage ratio. JEL classification numbers: G11, G24, G34. Keywords: Guangdong-Hong Kong-Macao Greater Bay Area, Leverage ratio, Influencing factors, Two-way fixed effects.

Financial Structure Reform and Enterprise Debt Risk Prevention

Based on the financial structure database (FSD) and the global listed enterprises database (Osiris), this paper investigates the relationship between financial structural reform and corporate debt risk by using the two-way fixed effect model. Research results show that for every 1% increase in the degree of financial development, the corporate leverage ratio will decline by about 0.4%. We have studied the heterogeneity of the relationship. The empirical results show that for enterprises with weaker associations with the government, the improvement of financial development is more conducive to reducing the leverage ratio of enterprises. For countries with higher household savings rate, higher GDP growth rate or higher M2 growth rate, enhancing financial development to guard against corporate debt risk would be less effective. For countries with higher information disclosure requirement or stricter market supervision, promoting financial development can reduce corporate leverage ratio more effectively. To prevent the risk of corporate debt, the government needs to restructure the financial structure, improve the transparency of listed company information, strengthen market supervision and improve the level of financial marketization.

Systematic risk, the tradeoff of leverage and IPO first-day returns

In this paper, we investigate IPO first-day returns in French market. Our focus is to assess the relationship between equity risk, corporate leverage and IPO initial returns. Based on data of 254 French IPOs, traded on Euronext/Alternext markets over the period 2006 and 2016, we find that estimated beta and idiosyncratic volatility are strongly and negatively related to book and market net gearing ratios. We also find that the interaction terms between equity risk measures and corporate leverage ratios are inversely related to IPO first-day returns. In addition, we highlight that industry and macroeconomic environment variables are significant predictors of equity initial returns. Robustness check of our findings indicates less relevant results for corporate leverage when it is estimated as independent variable.

Judicial efficiency and capital structure: An international study

We investigate a particular aspect of creditor rights, judicial efficiency, and its influence on firms' corporate leverage in 69 countries. Increasing creditor rights makes credit more readily available due to greater loan supply, but firms use less leverage to avoid premature liquidation. We find that efficient judicial systems are associated with lower corporate leverage ratios. Managers perceive higher leverage in the presence of more efficient judicial systems as a serious threat to their jobs or private benefits continuing. Our results indicate that stronger creditor rights alone do not explain corporate leverage without taking into account efficient enforcement of these rights.

Capital Structure of Real Estate Firms in Chinese Stock Market

This paper investigates the determinants of capital structure of real estate firms in China. An empirical study on determinants of capital structure of real estate in Chinese listed firms is conducted using a relatively regression of accounting data for 44 A-share financial listed companies over the quarter from 2008 to the third quarter of 2011. First, this paper identifies that the pecking order theory in China is different from western countries. Second, the results show that profitability, non-debt tax shields and liquidity are significant influence factors in financial sector, while others like size, growth, tangibility and non-circulating share should be judged by the size of the company. Moreover, firm size and non-circulating shares are almost positively related to the corporate leverage ratio. It is also found that Chinese institutional characteristic affects the capital choice decision and the largely state ownerships do affect capital structure choices.

How Important are Financial Shocks for the Canadian Business Cycle?

In this paper, we investigate the importance of financial shocks for the Canadian business cycle employing the financial friction DSGE framework following Bernanke, Gertler, and Gilchrist with an extension of a small-open economy feature. In particular, we explored the importance of an external finance premium shock and an aggregate net worth shock. In order to identify financial shocks in the model, we utilized financial data in estimating our model. Our variance decomposition results showed that the external finance premium shock to account about 7.5% and the aggregate net worth shock to account about 5.6% of the variance of the business fixed investment in Canada. Also, our historical decomposition results and smoothing of the various financial variables showed that data on corporate leverage ratio to be particularly useful in identifying the financial shocks in the model. Finally, when the financial shocks were present in the model, relative importance of the investment-specific technology shock was substantially subdued that it accounted for only 17% of the variance of the business fixed investment –much lower than the results reported in the former empirical studies.

Inside Debt and Stock Price Performance

We analyze whether paying CEOs with inside debt (pensions and deferred compensation) benefits shareholders. We find that stock price reaction to initial revelation of inside debt information following the SEC amendment is significant and positive, albeit delayed. In the subsequent revelation of information pertaining to the use of inside debt for firms that disclosed no inside debt compensation in the first revelation, the stock price response is immediate and significantly positive. In the recent financial crisis, firms that use a combination of inside debt and equity in compensating their CEOs had better stock price performance than firms that pay their CEOs with equity, but no inside debt. Both groups of firms did not perform substantially different in post-crisis. During the crisis, among firms that use inside debt, firms that employ a debt bias in compensation (debt-to-equity compensation of the CEO exceeds the corporate leverage ratio) performed better than firms that employ an equity bias. Our evidence support Edmans and Liu (2011)’s theoretical propositions that optimal level of inside debt is positive, pure equity compensation is inefficient and, that a debt bias is desired when insolvency is likely. Findings have implications for firms and policymakers in terms of risk management through managerial compensation. We deduce that inside debt also enhances hedging possibilities for stock investors through stock selection and portfolio choice.

A Continuous-Time Analysis of Optimal Restructuring of Contracts with Costly Information Disclosure

This paper studies the role of restructuring, as compared to the one of liquidation, in valuation of long-term debt contracts in a continuous-time model with costly information disclosure. In asset-pricing literature, Merton’s (J Finance 29:449–470, 1974) contingent-claim models have been long used for valuation of corporate securities and loans. However, since they basically assume sufficiently complete security structures in markets, the literature is not necessarily suitable for examining costly-information problems. On the other hand, in corporate-finance literature, it has been well known that agency costs (i.e., conflicts of interest among agents) distort corporate capital structure under costly-information problems. However, the effect of the distortion on valuation of securities and loans has not been explicitly studied either in theory or in practice. This paper bridges such a gap between the two literatures. This paper shows that, under a costly-information problem, corporate leverage ratios are higher when restructuring is expected to be accepted in default than otherwise. The risk of a jump to liquidation increases the default probability in short term, and decreases the probability of restructuring over time.

The Response of Corporate Financing and Investment to Changes in the Supply of Credit

AbstractWe examine how shocks to the supply of credit impact corporate financing and investment using the collapse of Drexel Burnham Lambert, Inc.; the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; and regulatory changes in the insurance industry as an exogenous contraction in the supply of below-investment-grade credit after 1989. A difference-in-differences empirical strategy reveals that substitution to bank debt and alternative sources of capital (e.g., equity, cash balances, and trade credit) was limited, leading to an almost one-for-one decline in net investment with the decline in net debt issuances. Despite this sharp change in behavior, corporate leverage ratios remained relatively stable, a result of the contemporaneous decline in debt issuances and investment. Overall, our findings highlight how even large firms with access to public credit markets are susceptible to fluctuations in the supply of capital.

Profits and Capital Structure

In the static trade-off theory, when profits increase, the firm should issue more debt and reduce equity to shield the profits from taxation or agency abuse. When a corporate leverage ratio is explained by firm profits, it is well-known that a negative regression coefficient is usually found. The literature (e.g., Myers (1993), Fama and French (2002), and Welch (2007)) considers this negative relationship to be a particularly serious rejection of the static trade-off theory.In this paper, we show that the literature has misinterpreted the evidence as a result of the wide-spread use of familiar, but inappropriate, empirical methods. We make four main points.1. We show that highly profitable firms do actually tend to issue debt and repurchase equity. The least profitable firms tend to reduce debt and issue equity. These facts are empirically very robust.2. Firm size plays an important mediating role in this relationship that gets hidden when leverage ratios are used. Large firms tend to be more active in the public debt markets, while small firms tend to be relatively more active in the equity markets.3. The type of empirical work that is appropriate depends on the model to be tested. We present a simple static trade-off agency-based model of capital structure. According to the model, the appropriate testing structure is a pair of regressions: one explaining debt, and the other explaining equity. When we estimate this model, we find the model's predictions perform rather well. Profits are not properly exogenous according to the model. We discuss how to deal with the exogeneity problem within the context of the model.4. In the model, issuing decisions depend on market conditions ('market timing'). Empirically, bad market conditions have a particularly strong impact on small and low-profit firms. Larger and more profitable firms are less strongly affected by market conditions.Contrary to what is usually believed, the empirical evidence on profits and capital structure seems easy to interpret from the perspective of the static trade-off theory.

The Response of Corporate Financing and Investment to Changes in the Supply of Credit

We examine how shocks to the supply of credit impact corporate financing and investment using the collapse of Drexel Burnham Lambert, Inc., the passage of the Financial Institutions Reform, Recovery, and Enforcement Act, and regulatory changes in the insurance industry as an exogenous contraction in the supply of below-investment-grade credit after 1989. A difference-in-differences empirical strategy coupled with a variety of treatment-control comparisons reveals that substitution to bank debt and alternative sources of capital (e.g., equity, cash balances, trade credit) was extremely limited. Consequently, net investment decreased almost one-for-one with the contraction in net issuing activity. Further, the impact of the credit contraction on financing and investment varied cross-sectionally as a function of geographic heterogeneity in the cost of bank capital and the credit risk of borrowers. Despite this sharp change in behavior, corporate leverage ratios remained relatively stable, a result of the contemporaneous decline in debt issuances and investment. Overall, our findings highlight how even large firms with access to public credit markets are susceptible to fluctuations in the supply of capital.