Emerging economies provide interesting scenarios for examining how institutional context influences the financing behavior of firms. In this study, we examine the capital structure of Chinese listed firms following the SplitShare Structure Reform of 2005. This reform allowed a reduction of government ownership by making government shares tradable. We find that the impact of government ownership on leverage is dependent on whether the government is the largest shareholder in a firm and whether the government ownership is through a parent state-owned enterprise. In addition, we document that the largest non-government shareholder positively influences leverage. Overall, our results reveal that the largest controlling shareholder, either government or non-government, has a significant impact on the capital structure of Chinese firms.
۲۰۱۸ Sun Yat-sen University. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Introduction

Capital structure decisions are influenced by firm-specific, industry-specific and institutional factors. Rajan and Zingales’s (1995) seminal analysis of seven developed countries shows the importance of these three types of factors. Although the variables that influence financing decisions in developed countries are also influential in emerging economies, Booth et al. (2001) show that distinctive institutional features in emerging countries also play important roles. Emerging countries therefore provide interesting scenarios for studying a variety of institutional characteristics. Throughout the last decade, academics have become increasingly interested in studying the distinctive institutional context of China—the world’s largest emerging economy. Studies of the financing behavior of Chinese firms (Chen, 2004; Allen et al., 2005; Zou and Xiao, 2006; Huang and Song, 2006; Bhabra et al., 2008) report that these firms rely on informal financing channels, prefer short-term finance and use substantially lower amounts of long-term debt than similar firms in developed markets. Ayyagari et al. (2010) document that Chinese firms obtain 20% of their funds from banks and 80% from channels such as retained earnings, informal sources, loans from family and friends, trade credits, investment funds and equity. Chen (2004) and Zou and Xiao (2006) find that the well-documented firm-specific determinants of leverage such as firm size, profitability, growth opportunity and asset tangibility are also relevant in China. Yet, the low explanatory power of these determinants calls for more research into the impact of institutional features on capital structure in China. A notable institutional context in China is that the ownership of publicly traded firms is highly concentrated, and the government is a major player in corporate financing (Sun and Tong, 2003). Government ownership can induce firms to borrow more through preferential loan policies and loan guarantees and an intention to maintain state control. Alternately, it can lead to less borrowing due to opportunistic managerial behavior and the higher likelihood of approval of equity issues.1 Among a handful of studies of the effect of government ownership on capital structure, Huang and Song (2006) and Zou and Xiao (2006) observe no impact of government ownership on the leverage of Chinese firms, whereas Bhabra et al. (2008) and Li et al. (2009) document a positive impact on long-term debt. Pessarossi and Weill (2013) show that government ownership facilitates the issuance of corporate bonds.