Abstract

     An essential issue of listed firms is adjusting their capital structure as stock market volatility increases. Our study examines this concern by using panel data of the Shanghai Stock Exchange for the period 2008–۲۰۱۸٫ We find that stock market volatility has immediate positive effects on both total market leverage and short-term market leverage but a negative influence on the long-term market leverage of Chinese listed firms. In this scenario, Chinese listed firms adjust their debt structure by using high bank debts and cutting trade credit due to lower debt costs. Further analyses confirm that the proportion of bank debts to total debts visibly increases while that of trade credit to total debts distinctly decreases. Furthermore, we implement robust tests regarding potential issues, such as sample selection, model selection, endogenous factors, and quantile regression to strengthen the robustness of the main findings. This study provides the first framework for investigating a link between the stock market volatility and capital structure decisions in a typical emerging market.

Introduction

     To date, determinants of capital structure have remained an incomprehensible subject in corporate finance. When firms are allowed to issue stocks on the equity market, equity issuance plays a vital role in the surging corporate capital. In terms of volatility, Welch (2004) documents that a critical matter of corporate finance is the volatility of stock price as a driver of notable changes in the behaviors and financial decisions of corporate managers. Figlewski and Wang (2000) demonstrate that the increase of the volatilities of stock market returns and individual stock returns leads to the decline in market values at the firm level. Following market timing theory, listed companies tend to issue equity when their market values are comparatively high relative to their book and past market values, and then repurchase their issued equity when their market values are low, which exerts a persistent effect on corporate capital structure (Baker & Wurgler, 2002). Chen et al. (2014) and Ahmed and Hla (2019) show that the volatility of individual stock returns significantly influences the capital structure of listed firms in the United States (US) and Pakistan markets, respectively. Most of their findings support the prediction of Tradeoff Theory (TOT) that companies diminish debts to balance and deal with the increasing prospect of default owing to high volatility risk; still, the practical results of Ahmed and Hla (2019) from the Pakistan market are pretty complicated. Similar to Pakistan, China is known as a developing equity market that is unstable, sensitive, and enormously volatile with unexpected shocks from the global market. In addition, the unique capital structure and debt structure of Chinese enterprises are inherently an exciting topic and thus widely explored in research (Fan et al., 2021; Zhang et al., 2015). To our best knowledge, the nexus between stock market volatility and corporate capital structure has not been explored. Surviving literature and evidence have powerfully prompted us to investigate the effect of stock market volatility on the capital structure choices of listed firms in the concrete context of the China stock market rather than imitating previous studies which focus on the volatility effect of individual stock returns on the corporate leverage.

Conclusion

     Choosing the capital structure as the increased stock market volatility is a vital concern of listed firms. This matter becomes more critical for listed firms activating in emerging markets, especially in China’s equity market, due to the following problems. First, emerging equity markets are immature and volatile. Simultaneously, listed firms in developing markets are quite sensitive to the equity market’s volatility. Second, thus far, corporate financing in China market essentially proceeds from internal funding and bank debts. In addition, Chinese firms universally have a high proportion of mature debts. Third, trade credit is an unofficial debt channel popularly used by Chinese firms when facing strict procedures from banks and credit institutions.

     Our study examines how the Chinese stock market volatility immediately affects the capital structure choices of Chinese listed firms from 2008 to 2018. The unique point of this research is the approach based on the capital use routines of Chinese firms instead of using two traditional capital structure theories to explain Chinese corporate capital structure, as in excellent previous literature (Chen, 2004; Huang & Song, 2006; Ni & Yu, 2008; Tong & Green, 2005; Zou & Xiao, 2006). We find that Chinese listed firms use the total market leverage and short-term market leverage at high levels, but long-term market leverage is used at low levels when the China stock market volatility increases and the lending interest simultaneously decreases. Empirical results point out that the positive correlation between corporate market leverage and stock market volatility is derived from the decline in the listed firm’s market value and the increase in bank debts. Trade credit significantly decreases while the bank debts tend to strongly increase in the debt structure of Chinese listed firms as the China stock market increases in volatility. Furthermore, we detect that short-term debts and bank debts are preferred in the capital structure of Chinese listed firms in response to the growing uncertainty of the China stock market and the change in lending interest rate.