Pacific-Basin Finance Journal 30 (2014) 87–113

Contents lists available at ScienceDirect

Pacific-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin

What are the reliably important determinants of

capital structure in china?☆
Chun Chang a, Xin Chen b,⁎, Guanmin Liao c
a
Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University, 800 Dongchuan Road, Minhang District,
Shanghai 200240, China
b
Antai College of Economics and Management, Shanghai Jiao Tong University, 535 Fahuazhen Road, Shanghai 200052, China
c
School of Accountancy, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing 100081, China

a r t i c l e i n f o a b s t r a c t

Article history: Existing studies disagree over the basic determinants of capital structure
Received 28 July 2013 in Chinese firms. We identify profitability, industry leverage, asset
Accepted 24 June 2014 growth, tangibility, firm size, state control, and the largest shareholding
Available online 30 June 2014
as reliable core factors explaining book leverage. Compared with evidence
from the United States and other countries, we identify three new core
JEL classification:
factors, and observe that the relative importance of four common core
G32
factors for Chinese firms is diverse. In particular, the state-control dummy
Keywords:
is negatively associated with book leverage, contrary to findings in certain
Capital structure previous studies. Additional tests indicate that such a negative effect of
China state-control derives primarily from easier access to equity financing.
Financial constraints © 2014 Elsevier B.V. All rights reserved.
State ownership
Leverage

1. Introduction

Among the vast literature of capital structure research, the majority of existing evidence is based on
firms in the United States. Recent cross-country studies of capital structure decisions have revealed that
previously identified factors in the U.S. studies are also crucial in capital structure decisions outside the
United States, both in developed countries (Rajan and Zingales, 1995; Wald, 1999) and in developing
countries (Demirguc-Kunt and Maksimovic, 1999; Booth et al., 2001). More recent international studies
pay particular attention to how institutional differences cross countries shape capital structure decisions

☆ We acknowledge financial support from the National Natural Science Foundation of China (Grant # 71172127 and # 71272233)
and from the liberal arts research and innovation plan of Shanghai Jiao Tong University.
⁎ Corresponding author. Tel.: +86 21 52301259.
E-mail addresses: cchang@saif.sjtu.edu.cn (C. Chang), xinch@sjtu.edu.cn (X. Chen), liaoguanmin@cufe.edu.cn (G. Liao)

http://dx.doi.org/10.1016/j.pacfin.2014.06.001
0927-538X/© 2014 Elsevier B.V. All rights reserved.
 88
Table 1
Comparison of selected studies about the determinants of Chinese capital structure.

Chen Tong and Green Huang and Song Zou and Xiao Bhabra et al. Qian et al. Li et al.
(2004) (2005) (2006) (2006) (2008) (2009) (2009)

Sample period
1995–2000 2002–2003 1994–2000 1993–2000 1992–2001 1999–2004 2000–2004

C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

Large listed firms Large listed firms Listed firms Listed firms Listed firms Listed firms NBS dataset

Dependent variable
Leverage measure Book leverage Book leverage Book leverage Book Leverage Market leverage Book leverage Book leverage
Market leverage Market leverage

Independent variable
Firm size Assets (+) Invested capital (+) Sales (+) Assets (+) Assets (+) Sales (+) Sales (+)
Profitability ROA (−) ROA (−) ROA (−) ROA (−) ROA (−) ROA (−) ROA (−)
Asset tangibility Fixed assets and Fixed assets (+) Fixed assets and Fixed assets (+) Fixed assets (+) Fixed assets (−)
inventories (+) inventories (+)
Growth Asset growth (+) Asset growth (+) Tobin's Q (−) M/B ratio (−) Tobin's Q (−) Sales growth
opportunities
Firm risk Change of Std. dev. of earnings Std. dev. of Std. dev. Of
earnings (−) earnings earnings (+)
State ownership State ownership State ownership State ownership State ownership (+) State ownership (+)
Tax Non-debt tax Non-debt tax Non-debt tax Non-debt tax
shields (−) shields (−) shields shields (−)
Effective tax rate (−) Marginal tax rate
Industry effect Industry dummies Industry dummies Industry dummies Industry median (+)
Industry concentration
Institutional effect Exchange dummy Region dummies Marketization index
Other Dividend Managerial ownership Foreign ownership A Shares Foreign ownership (−)
Dividend B Shares Asset maturity (+)
Legal-person shares Legal-person shares

This table reports the sample periods and measures of variables in seven studies about the determinants of capital structure in Chinese firms. The signs of the estimated coefficients for explanatory
variables are reported in parentheses if they are consistently significant.
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 89

(Gungoraydinoglu and Öztekin, 2011; Fan et al., 2012; Öztekin, forthcoming). Nevertheless, the capital
structure decisions in China have often been overlooked due to China's unique institutional environment.
China is currently the largest emerging market and the second largest economy worldwide. Its rapidly
expanding capital market is gradually opening to global investors and international firms. Clarifying the capital
structure choice of Chinese firms has become increasingly relevant. A number of studies have specifically
focused on China. For example, Huang and Song (2006) showed that the leverage of Chinese firms increases
with firm size and fixed assets, decreases with profitability, non-debt tax shields (NDTS), and Tobin's Q, but
does not correlate with state ownership. Qian et al. (2009) investigated how Chinese firms dynamically adjust
their capital structure to target ratios, and Li et al. (2009) examined the role of the institutional environment in
determining capital structure choices of a sample of firms mostly non-listed. These studies generally suggested
that critical factors in the U.S. studies of capital structure are also relevant in China.
However, current studies still disagree concerning the basic determinants of capital structure in
Chinese firms. Table 1 reports the findings of various papers on the regressions determining firm leverage.
Among the common determinants in all models, firm size and profitability remain highly stable across
models, whereas asset tangibility, growth opportunities, and firm risk have contradictory coefficients.
Firstly, firm leverage increases with asset tangibility, according to Bhabra et al. (2008), but decreases
according to Li et al. (2009). Secondly, the relationship between growth opportunities and leverage is
reported to be negative when using Tobin's Q as the proxy (Huang and Song, 2006; Bhabra et al., 2008),
but becomes positive or insignificant when using past sales or asset growth (Chen, 2004; Qian et al., 2009).
Thirdly, Chen (2004) found a negative relationship between firm risk and leverage, but the relationship is
positive as reported by Qian et al. (2009). Finally, Qian et al. (2009) and Li et al. (2009) both observed that
state ownership is positively associated with book leverage, whereas Firth et al. (2008) reported a
negative and significant correlation between state ownership and book leverage. Such comparison raises
an obvious question: What are the reliably important determinants of capital structure in China?
Our paper fills this gap by using the Bayesian information criterion (BIC) approach developed by Schwarz
(1978), which was applied to the U.S. data by Frank and Goyal (2009). The advantage of this approach is that
BIC resolves the problem of over-fitting by introducing a penalty term for the number of parameters in the
model. Thus, it allows us to identify reliable and robust factors related to the firm's capital structure choice
and to reduce confusion regarding basic facts caused by contradictory findings in previous studies. We do not
develop a theoretical framework that can explain the relationships we identify; however, identifying reliable
factors is essential before constructing a theoretical framework that can explain their roles.
China has distinct institutional features that could potentially affect corporate capital structure decisions.
First, China has a weaker legal and institutional environment in investor protection, corporate governance,
accounting standards, and government quality compared with most countries in existing studies (Allen et al.,
2005). Although bankruptcy laws1 have existed since 1988, the enforcement of these laws continues to be
problematic (Fan et al., 2009). For example, bankruptcy laws are ambiguous regarding creditor rights,
granting considerable room for governmental intervention of bankruptcy procedures. Consequently, valuable
assets can be sold cheaply and creditors often have difficulty recovering debt.
Ineffective bankruptcy enforcement can exert a substantial effect on a firm's borrowing choice.
Cross-country studies have shown that firms in countries with a weak legal system tend to use short-term
debt, rather than long-term debt (Demirguc-Kunt and Maksimovic, 1999). Consistent with previous findings,
the use of long-term debt by Chinese listed firms is the lowest among the countries studied to date (Bhabra
et al., 2008). Consequently, the corporate debt market in China is relatively under-developed, and the
majority of debt is in the form of bank loans. According to Kim et al. (2003), banks held 86% of all debt in China
and the public corporate debt amounted to only 2.8% of all outstanding debt at the end of 2002.
Second, state ownership dominates the Chinese capital market. Most listed firms in China are
privatized state-controlled enterprises (SOEs). The state maintains its controlling power through equity
holdings in SOEs directly or indirectly after listings (Sun and Tong, 2003). Moreover, China's banking
system is dominated by several large state-controlled banks (also listed). The presence of the state for the
listed SOEs offers implicit loan guarantees and lowers the cost of firms' financial distress. To maintain

1
The Bankruptcy Law was introduced in 1988 to address state controlled enterprise (SOE) bankruptcy and the 19th Chapter of the
Code of Civil Procedure was amended in 1991 to address the bankruptcy of other enterprises. The new Bankruptcy Law for all types
of firms was launched in 2007.
90 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

social stability and employment, the state can apply pressure to banks to supply loans to SOEs even if it is
detrimental to the banks' interests (Brandt and Li, 2003). Such SOE privileges do not come without
economic costs. Evidence suggests that private firms in China are denied access to bank loans and often
must resort to expensive trade credits (Brandt and Li, 2003; Cull et al., 2009). In periods of monetary
contraction, banks tend to give loan priority to state-controlled firms, thus further reducing the availability
of loans to private firms. Because of the popular use of short-term loans in China, many private firms have
often collapsed because of inadequate liquidity caused by banks refusing to renew loans.
Third, Chinese listed firms typically have one ultimate controller holding a significant percentage of
shares. The existence of such controlling shareholders causes the agency problem of expropriating
minority shareholders by controlling shareholders, as asserted by La Porta et al. (1999). Because of the lack
of effective law enforcement and weak corporate governance, individual shareholders do not obtain
adequate investment protection. As a result, controlling shareholders often treat their share capital as
a “free”2 source of financing. This can induce firms to prefer equity financing to debt, because equity
financing is not binding.
Fourth, Chinese government has been imposing explicit or implicit control of the volume and price of
equity issuance. The China Securities Regulatory Commission (CSRC) has adopted a review system for
equity issuance, instead of the registration system widely used in developed markets. In the early 1990s,
the quota of new shares issued was allocated to provinces and municipalities. The CSRC also set the initial
public offering (IPO) price in the range of 13–16 times the earnings per share from 1993 to 1998 (Chan et
al., 2004). Moreover, strict rules have been established to guide firms' eligibility for seasoned equity
issuances.3 Even if all requirements are satisfied, an approval from the CSRC is not guaranteed. If the state
regulator of securities extends favorable treatment to SOEs in seasoned equity financing, it might lead to
lower leverage in SOEs, whereas limited access to the equity market could force private listed firms to
finance through debt, even if they prefer equity.
Following the methodology of Frank and Goyal (2009), we estimate effects of variables determining
Chinese capital structure from 1998 to 2009. We complement the variable list of Frank and Goyal (2009)
with a state-control dummy, the largest shareholding, managerial holdings, and the marketization index
to incorporate the direct influence of unique institutional features of China. We also compare the relative
importance of core factors identified for Chinese firms with those for the U.S. firms and international firms,
to examine how the Chinese institutional environment alters the effects of common leverage factors.
Introducing market value into an inefficient Chinese stock market creates a substantial quantity of
irrelevant noises to capital structure decisions. Market leverage also induces a mechanical negative
relation between leverage and market to book ratio of assets. Thus, we employ book leverage in our main
tables, rather than market-based leverage. However, we report the results for market leverage in minor
factor regressions and in the robustness section. Because long-term debt is fairly low in Chinese firms, we
do not report the analysis of long-term leverage.
Using the same standards of Frank and Goyal (2009), we identify seven variables as reliably important
factors that are statistically significant and have coefficients of consistent signs across various models. The
seven core variables explain 36% of the variation in book leverage of Chinese firms, whereas the remaining
17 variables only add an additional 1.4%.

Profitability: firms with higher ROA tend to have lower leverage.

Industry leverage: firms in industries with higher median leverage tend to have higher leverage.
Asset growth: firms with higher asset growth tend to have higher leverage.
Tangibility of assets: firms with more tangible assets tend to have higher leverage.
Firm size: larger firms (with more assets) tend to have higher leverage.

2
Chinese firms do not typically pay regular cash dividends, but prefer stock dividends. Allen et al. (2005) observed that Chinese
firms tend to underpay cash dividends to their shareholders, compared with firms in other countries. To reduce potential misuse of
funds, the Chinese Securities Regulatory Commission (CSRC) has been pressing firms to pay cash dividends. In 2001, the CSRC
stipulated that firms could not have rights issues without paying continual cash dividends in the previous 3 years.
3
For example, after March 17, 1999, the profitability requirement for rights offering in the 3-year average return on equity (ROE)
of the firm must be greater than or equal to 10% and its ROE in each of the previous 3 years must be greater than or equal to 6%. Other
requirements also exist in addition to the profitability requirement.
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 91

State-control dummy: firms ultimately controlled by the state tend to have lower leverage.
The largest shareholding: firms with higher holdings of the largest shareholder tend to have lower leverage.
Compared with the core factors identified for the U.S. firms and the reliable determinants of leverage
for international firms (Öztekin, forthcoming), our set of core factors includes four common core factors
(profitability, industry leverage, tangibility, and firms size) and three new core factors (asset growth,
state-control dummy, and the largest shareholding). The four common core factors in our study show
effects of the same directions as for the U.S. firms and other international firms, but the magnitude of the
effects differs dramatically. Profitability is the most crucial core factor for Chinese firms, with a coefficient
of − 1.175 in the overall sample regression of core factors, considerably higher than the levels reported for
the U.S. firms or other international firms.4 The exceptionally large influence of profitability reflects the
financial constraints confronted by Chinese listed firms to issue equity or borrow new debt, such that
accumulating internal capital in Chinese firms is far more critical compared with firms in other countries.
Asset growth, however, reveals consistent positive effects in our book-leverage regressions, whereas it is not
among the core factors and has significantly negative effects on book leverage for the U.S. firms. The positive
effect of asset growth in our study might also be caused by the constraints of equity financing for Chinese
listed firms, in which fast-growing firms must finance mostly through debts, forcing leverage to increase.
Also we show a significantly negative association of the state-control dummy with book leverage and
such negative effects are observed in all yearly regressions from 2000 to 2009. Controlling for other core
factors, state-controlled listed firms tend to have 2.4% lower book leverage, shown by the results of the
overall sample regression. Although such findings are inconsistent with the general perception of
numerous previous studies, additional tests suggest that such negative effects of state-control primarily
derive from easier access to equity financing for state-controlled listed firms. In addition, we observe that
the negative effects of the largest shareholding on leverage are significant only within the subsample of
state-controlled listed firms. The results imply that higher state ownership could assist firms in obtaining
easier approval of equity issuance when state-controlled listed firms apply for seasoned equity issuance,
further supporting our explanation for the negative effects of the state-control dummy. Our findings
suggest that distinct Chinese institutional features, such as constraints for equity issuance, define the
unique determinants of capital structure.
This paper contributes to the literature by providing a reliable empirical foundation for future studies
on corporate capital structure decisions in China. Existing studies have used various model specifications
and different measures of variables, but have often revealed contradictory results in key variables. We not
only identify reliably important factors in capital structure decisions of Chinese firms, but also compare
our findings for Chinese firms with existing evidence from the U.S. firms and cross-country international
evidence. The comparison helps to clarify how the Chinese institutional environment affects the relative
importance of common factors, and how distinct Chinese institutional features directly shape the leverage
of listed firms. Lastly, we provide new evidence to show that the state-control may not always lead to
higher leverage, since it also facilitates access to equity financing.
The paper is organized as follows. Section 2 reviews the literature and discusses theoretical predictions.
We describe the data in Section 3. Section 4 reports the factor-selection process and empirical results,
followed by robustness tests in Section 5. Finally, Section 6 presents the conclusion.

2. Literature review and theoretical predictions

There are three principal theoretical models of capital structure. Trade-off theory argues that firms
balance the tax benefits of debt against the financial distress cost of debt (Myers, 1984). In the agency
theoretical framework, debt mitigates the agency problem between the shareholder and manager, but can
also create new agency problems between the debt holder and shareholder, such as asset substitution or
the under-investment problem (Stulz, 1990). Pecking order theory suggests a preference sequence for
firms' financing choice because of the existence of information asymmetry. Thus firms prefer retained

4
Frank and Goyal (2009) report that the coefficient for profitability of core-factor regression using book leverage model (TDA) is
only −0.233 in the 2000 to 2003 period. Fan et al. (2012) estimate the coefficient for ROA to be −0.0117 for firms from all 39
countries in the period from 1999 to 2006 and to be −0.2268 for firms from developing economies in the period from 1991 to 2006.
92 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

earnings to outside financing, and use debt before equity issuance if internal funds are inadequate (Myers
and Majluf, 1984).
Based on prior studies of Chinese capital structure, we adjust the variable list5 of Frank and Goyal
(2009) by adding variables related to Chinese institutional features. Our final variables include proxies for
firm size, profitability, growth opportunities, nature of assets, taxes, firm risk, industry conditions, stock
market conditions and macroeconomic conditions, and Chinese institutions. A description of these
variables is presented in Appendix Table 1.

2.1. Firm size

Large firms tend to be diversified and have stable cash flow, so their probability of bankruptcy is small.
Therefore, the trade-off theory asserts that large firms have higher leverage compared with small firms. In
addition, large firms tend to have less asymmetric information. According to the pecking order theory,
large firms prefer equity to debt, and thus have lower leverage. Most empirical studies in the United States
have shown a positive relationship between firm size and leverage, supporting the trade-off theory.
Consistent with evidence from the U.S., existing Chinese studies (Table 1) have uniformly observed that
large Chinese firms are likely to have high leverage. Following Frank and Goyal (2009), we also use firm
age as a proxy for firm size.

Measures: (1) log of book value of total assets, and (2) the number of years after listing.

2.2. Profitability

Static trade-off theory suggests that profitable firms should borrow more because they have greater
needs to shield income from taxation. In the agency theoretical framework, profitable firms tend to have
severe free cash-flow problems, thus requiring also higher leverage to restrain management discretion.
However, pecking order theory posits that profitable firms become less levered over time because they
have internal funds to support investment and are less likely to seek debt financing. Most empirical
findings in the United States support that leverage decreases with profitability (Harris and Raviv, 1991). To
accommodate such empirical findings, recent development of the dynamic trade-off model asserts the
negative relation between leverage and profitability (Strebulaev, 2007).
Existing studies of capital structure in Chinese firms have also revealed a robust negative relation
between leverage and profitability (Table 1). Because of the constraints in external financing that Chinese
listed firms confront, both in the form of equity issue and debt raising, we assume internal accumulation of
capital to be exceedingly more crucial in China than in the United States. In addition, the regulatory
requirements of profitability for SEOs in China cause more profitable firms to issue more equity, leading
stronger negative relation between leverage and profitability.

Measure: Return on Assets (ROA).

2.3. Growth opportunity

Theoretical disagreement exists regarding the relationship between leverage and growth opportuni-
ties. Firms with high-growth opportunities tend to have small free cash-flow problems and high financial
distress cost of debt. Trade-off theory asserts that firm leverage decreases with growth opportunities. In
the agency theoretical framework, firms with high-growth opportunities are more likely to have interest
conflicts between shareholders and debt holders in the case of financial distress,6 resulting in a high
agency cost of debt. Thus, high-growth firms should use less debt. However, Chinese firms with abundant
growth opportunities might not be able to raise adequate equity to fund their growth because of the strict

5
R&D expenses/sales, NOL carry-forwards/assets, investment tax credit/assets, debt rating dummy, and term spread in the
variable list of Frank and Goyal (2009) are not included in our analysis because these variables are either undisclosed or unavailable
throughout our sample period.
6
For instance, in the case of financial distress the shareholders may reject a project with positive net present value (NPV) because
most of the benefits will be extracted by the debt holders.
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 93

constraints of the Chinese government on equity issuance. Consequently, rapidly growing firms must fund
their projects primarily through borrowing, causing a positive relationship between growth opportunity
and leverage.
A common proxy of future growth opportunities is the market to book ratio of assets (MB).
Nevertheless, it is affected by market mispricing and is subject to the mechanical negative relation to the
market-based definition of leverage. An alternative proxy of growth opportunities is historical growth of
assets or sales. Between the two types of measures, the MB ratio is the most reliable proxy in the United
States (Adam and Goyal, 2008).
Table 1 presents contradicting evidence regarding how growth opportunities affect the firm leverage of
China, when alternative proxies are employed. The Chinese stock market features high turnover and
synchronicity. In such an environment, stock prices provide noise signals about firm value, so the MB ratio
might not play a role as crucial as it does in the United States. Thus, we anticipate a lower importance for
the MB ratio in explaining book leverage. The other measure, asset growth, while capturing historical
growth, can be a sound proxy for growth opportunities if market signals are too noisy. As stated, Chinese
listed firms experiencing rapid growth might be forced to finance their investments by using debt rather
than equity, because they are typically unable to issue new equities freely in the market. Therefore, we
expect relatively diverse effects of asset growth from the evidence presented in the United States and the
direction of its effect can be positive. Finally, we also include capital expenditure in our model, following
Frank and Goyal (2009).

Measures: (1) MB ratio of assets, (2) asset growth, and (3) capital expenditure scaled by total assets.

2.4. Nature of assets

Firms with considerable tangible assets tend to have low expected costs of distress and few debt-related
agency problems. Trade-off theory asserts that firm leverage increases with tangibility of assets. However,
firms with high tangibility can have low leverage because they tend to have low information asymmetry,
leading to few costly equity issuances.
Previous empirical studies of Chinese firms have not reported consistent signs for the coefficient of
tangibility (Table 1). Tangibility is positively related to leverage in samples of listed firms, but negatively
related to leverage in a sample of firms mostly non-listed. We include industry uniqueness and general
and administrative expenses in the model, because firms producing unique products have high distress
costs and firms with larger discretionary expenditures tend to have more intangible assets. Although R&D
expenses can be an alternative measure, we are unable to include it in our model because Chinese firms
typically do not disclose R&D expenses.

Measures: (1) tangible assets, (2) industry uniqueness dummy, and (3) general and administrative
expenses scaled by sales.

2.5. Taxes

Trade-off theory suggests that firms with high tax rates hold high debt because high tax rates increase
the value of interest tax shields. Non-debt tax shields, such as depreciation, can be a substitute for the
interest expenses and consequently can reduce the need for carrying debt. Because of the access
constraints to external financing, we expect the relationships between leverage and tax-related variables
to be weak, particularly for non-SOEs with severe constraints. After all, securing a financing source for key
investment is more critical than saving taxes.
Previous Chinese studies have revealed NDTS to be negatively related to leverage, in support of
trade-off theory. However, tax rates were included in only two papers and appeared insignificant in their
results.

Measures: (1) effective tax rate,7 and (2) depreciation expenses.

7
Effective tax rate is a measure of the actual tax burden of listed firms. The official tax rate can often be discounted in practice
because of various types of tax refund or favorable treatment.
94 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

2.6. Firm risk

Risky firms tend to have volatile cash flows and high costs of financial distress. Trade-off theory
assumes that risky firms use less debt. By contrast, pecking-order theory predicts that risky firms have
high leverage if firms with volatile stocks have severe adverse selection. Frank and Goyal (2009) report
a negative relationship between firm risk and leverage, lending support to trade-off theory.
With implicit guarantee from the state, state-controlled listed firms seldom fail and are often bailed
out in periods of financial distress. Therefore, creditors, such as banks, might not take firm risks as
serious as in the U.S. market in their lending-decision process. Moreover, state-controlled firms often
borrow large quantities of money to pursue politically motivated projects, which in turn might cause
substantial risks for firms. Given these distorted incentives in Chinese firms, we assume that the
relationship between leverage and firm risks can differ from the negative relationship reported in the
United States.
Several Chinese studies have included earnings volatility in their models as a proxy of firm risk, but
reported inconsistent results. Qian et al. (2009) observe firm risk to be positively related to leverage,
whereas Chen (2004) shows firm risk to be negatively related to leverage. Consistent with Frank and
Goyal (2009), we employ the standard deviation of stock returns in this paper as a proxy for firm risk.

Measure: standard deviation of stock returns.

2.7. Industry conditions

The level of industry leverage can be interpreted as a target capital structure for firms in the industry.
Moreover, it reflects omitted industry factors affecting capital structure decisions, such as technology and
regulation. In both cases, industry leverage exerts substantial effects on a firm's choice of leverage ratio.
Frank and Goyal (2009) report industry median leverage to be the most reliable and important
determinant of leverage in the United States. This variable alone explains 19% variation of leverage.
However, among the seven studies of Chinese capital structure presented in Table 1, only Li et al. (2009)
include industry median leverage in their model as a control variable, and three other studies include
industry dummies in their models instead.
Similar to asset growth, industry growth captures the effects of limited access to equity financing. Its
association with book leverage can be positive. Following Frank and Goyal (2009), we also use a dummy of
regulated industry as a proxy for industry conditions.

Measures: (1) industry median leverage, (2) industry median growth, and (3) regulated industry.

2.8. Stock market conditions

Market timing theory suggests that firms issue equity following stock price run-ups or when the
general market condition is favorable, so that stock returns or market return is negatively related to book
leverage. However, in China, firms are not allowed in issuing equities freely. Such constraints should cause
a weaker negative relation for Chinese firms. When positive stock returns reflect promising investment
opportunities, we can observe a positive relation between stock return and leverage, because investment
funds must be raised from debt if equity financing is infeasible.

Measures: (1) cumulative raw stock returns and (2) cumulative market returns.

2.9. Macroeconomic variables

Because the Chinese corporate bond market is relatively immature, firms typically seek bank loans when
they wish to borrow. Firms' borrowing decisions can be affected by macroeconomic conditions.
During monetary contractions, the Chinese government orders banks to reduce their number of loans.
In this case, firms, particularly private firms, might not be able to borrow sufficient funds. During monetary
expansions, banks are allowed in providing abundant loans to the market, so consequently firms can
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 95

obtain loans easily. Frank and Goyal (2009) report a positive relation between leverage and gross domestic
product (GDP) growth in the United States when controlling for core factors.
Trade-off theory predicts leverage to be positively related to the expected inflation rate because the
value of interest tax shields is greater when inflation is higher. Frank and Goyal (2009) observe expected
inflation to be positively related to leverage in the United States and classify it as a core factor in leverage
decision. In China, the interest rates of Chinese banks are heavily regulated, often resulting in a negative
real interest rate. Firms anticipating high inflation in the future might borrow more funds to take
advantage of the hidden interest subsidy.

Measures: (1) growth in profit after tax of industrial firms, (2) GDP growth, and (3) expected
inflation rate.

2.10. Variables of Chinese institutions

For the majority of Chinese listed firms, an ultimate controlling shareholder exists. The central conflict
of interest for Chinese firms exists between minority shareholders and controlling shareholders.
Because of weak law enforcement and corporate governance, controlling shareholders often treat outside
equity as a “free” source of financing compared with debt because outside equity is not binding. As long
as the new equity does not threaten their controlling power, controlling shareholders prefer equity
financing to debt. High percentages of share holdings allow the controlling shareholders to issue new
shares without the fear of losing control due to dilution, leading to a preference for equity issuance over
debt. Therefore, we anticipate a negative relationship between the largest shareholder's holdings and
leverage.
The agency problem between managers and shareholders is also severe because of the lack of effective
monitoring and the weak institutional environment in China. In the agency theoretical framework, debt
reduces free cash flows available for expropriation and mitigates both types of agency problem. The
interests of managers who hold more shares are aligned effectively with shareholders, thereby reducing
the need for using debt to mitigate agency problems. All things being equal, we expect leverage to be
negatively related to managerial share holdings.
The presence of the state offers implicit loan guarantees and lowers the cost of firms' financial
distress. Easier access of SOEs to bank loans can lead to higher leverage. Consistent with this
view, two of the five studies presented in Table 1 show that the percentage holdings of SOEs exert a
positive and significant effect on leverage. However, SOEs can also face fewer constraints in equity
issuance. SOEs might receive favorable treatments when applying for seasoned equity financing. Such
priority in equity financing can lead SOEs to borrow less, thus having lower leverage. In line with
this argument, Firth et al. (2008) report that the dummy of SOE is negatively and significantly
correlated with book leverage. The net effect of the state-control dummy, however, is yet empirically
unclear.
Finally, the institutional environment of an economy, such as law and creditor protection, can
facilitate enforcing financial contracts, which consequently affect the cost of borrowing. In addition
to the generally weak legal and institutional environment in China compared with the United States,
regions in China exhibit large disparities in institutional development, which are not observed
among states in the United States. The extent of marketization of a region can affect the effectiveness
of bankruptcy enforcement and the difficulty of recovering debt. Thus, creditors are more willing to
provide loans (and at lower interest) to firms in regions with more effective institutions. Under
such logic, we assume that listed firms located within regions with enhanced institutional
development tend to have higher leverage. Using a sample of Chinese firms mostly non-listed, Li et al.
(2009) show that firms in regions with a higher marketization index are associated with lower levels of
long-term debt, although they do not find a significant relationship between marketization and total
leverage.
In this paper, we include four variables reflecting unique institutional features of China.

Measure: (1) percentage of shares held by the largest shareholder, (2) ratio of shares held by top
management, (3) state-control dummy, and (4) regional marketization index.
96 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

3. Data and sample

3.1. Data description

Our sample consists of Chinese A-share listed companies (excluding financial firms and firms listed in
the growth enterprise market) between 1998 and 2009. We use financial items, listing year, and stock
returns from the China Stock Market and Accounting Research (CSMAR) database, and ownership data,
stock market capitalization, and industrial sector data from the CCER China Economic and Financial
Database.8 We also obtain macroeconomic data from the China Economic Internet (CEInet) statistics
database. The regional marketization index data is derived from Fan et al. (2010). Our original sample
contains 15,250 firm-year observations. We drop 2143 observations because of missing variables,9
yielding a final sample of 13,107 firm-year observations. The effective tax rate (ETR) variable is winsorized
at 0 and 1, and other continuous corporate-level variables are winsorized at the top and bottom 1% of their
respective distributions.

3.2. Descriptive statistics

Table 2 reports the descriptive statistics for the variables used in our regression models. The average
book-value based leverage and market-value based leverage (LEV and MLEV) are respectively 0.272 and
0.153. The book-value based leverage is similar to that of the U.S. companies reported in Frank and Goyal
(2009), whereas the market-value based leverage is much lower.10 Such a diverse pattern reflects the
higher equity valuation of Chinese listed firms than the U.S. firms in our sample period. The average
book-value based leverage of non-SOEs is higher than that of SOEs, whereas the average market-value
based leverage of non-SOEs is lower than that of SOEs. The mean values for the MB ratio and asset growth
(Agrow) are respectively 2.416 and 0.14, both of which are much greater than those of firms from the
United States as reported in previous studies.11 The average of ETR is only 0.178 in our sample, much lower
than the typical number in other economies, implying that Chinese listed companies bear a lighter
effective income tax burden. The ratio of shares held by the largest shareholder (Blockshare) has a mean
value of 0.403, suggesting that the ownership structure of Chinese listed companies is highly concentrated.
The average ratio of shares held by top management (Topshare) is only 0.011. The low managerial holding
implies relatively high agency costs. In our sample, approximately 72% of listed firms are state-controlled.
The average annual GDP growth rate during the sample period is 10%, reflecting the strong economic
growth of China in recent decades. Overall, most of our descriptive statistics are comparable to those
described by Cai et al. (2008) and Huang and Song (2006), which respectively examine debt-maturity
choice and capital structure of Chinese listed companies.

3.3. Correlation matrix

Table 3 reports the correlation matrix between our main variables. The correlation coefficient between
two measures of leverage, LEV, and MLEV, is 0.78, indicating that they are close substitutes. Both LEV and
MLEV are positively and significantly correlated with LnAsset, Age, Tangas, NDTS, Stockstd, Ind_LEV,
Ind_MLEV, RegInd, GDPgrow, and inflation, but exhibit negative and significant correlations with ROA,
Agrow, Blockshare, Topshare, StockRet, and MarRet. These findings are generally consistent with our
predictions. We observe SOEs to be negatively correlated with LEV, with a coefficient of − 0.07 and a
significance level of 1%, but without a significant correlation with MLEV. The negative correlation between

8
For each firm in 1998, its ultimate controller is taken from that in 1999 because such information is unavailable in 1998 from the
CCER database.
9
We fill in missing observations of industrial-sector data with observations from later years. Moreover, we fill in missing
observations and replace extreme observations of shares held by the largest shareholder in the CCER database with those from the
CSMAR database.
10
The average debt ratio measured at book value for the U.S. firms is 0.29.
11
For instance, the average MB ratio and asset growth of the U.S. firms reported by Frank and Goyal (2009) are only 1.76 and 0.07,
respectively.
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 97

Table 2
Summary statistics for Chinese listed firms.

Overall sample Non-SOE SOE

# of obs. Mean Median Std. dev. Min Max # of obs. Mean # of obs. Mean t-Statistics

LEV 13,107 0.272 0.257 0.187 0 1.116 3705 0.292 9402 0.264 7.713***
MLEV 13,107 0.153 0.122 0.125 0 0.542 3705 0.152 9402 0.153 −0.265
LnAsset 13,107 21.228 21.115 1.04 18.878 24.407 3705 20.897 9402 21.358 −23.334***
Age 13,107 6.568 6 3.859 1 16 3705 6.715 9402 6.51 2.734***
ROA 13,107 0.027 0.036 0.087 −0.435 0.214 3705 0.019 9402 0.03 −6.941***
MB 13,107 2.416 1.942 1.556 0.889 9.835 3705 2.709 9402 2.3 13.633***
Agrow 13,107 0.14 0.088 0.282 −0.467 1.478 3705 0.14 9402 0.14 0
Capex 13,107 0.027 0.007 0.088 −0.268 0.358 3705 0.019 9402 0.03 −6.451***
Tangas 13,107 0.298 0.273 0.179 0.005 0.78 3705 0.261 9402 0.313 −14.956***
GAexp 13,107 0.009 0 0.038 −0.041 0.228 3705 0.01 9402 0.008 2.254**
Unique 13,107 0.176 0 0.38 0 1 3705 0.161 9402 0.181 −2.674***
NDTS 13,107 0.024 0.021 0.016 0.001 0.082 3705 0.021 9402 0.025 −13.298***
ETR 13,107 0.178 0.152 0.165 0 1 3705 0.167 9402 0.182 −4.925***
Stockstd 13,107 0.029 0.028 0.009 0.014 0.052 3705 0.031 9402 0.029 14.094***
Ind_LEV 13,107 0.261 0.261 0.063 0.065 0.467 3705 0.26 9402 0.262 −1.39
Ind_MLEV 13,107 0.139 0.118 0.07 0.016 0.406 3705 0.141 9402 0.138 1.98**
Indgrow 13,107 0.093 0.084 0.049 −0.091 0.408 3705 0.09 9402 0.094 −3.229***
RegInd 13,107 0.088 0 0.283 0 1 3705 0.033 9402 0.11 −13.943***
StockRet 13,107 −0.118 −0.004 0.739 −3.133 0.788 3705 −0.134 9402 −0.112 −1.566
MarRet 13,107 0.493 0.017 0.918 −0.584 2.494 3705 0.594 9402 0.453 7.953***
GDPgrow 13,107 0.1 0.096 0.018 0.076 0.142 3705 0.103 9402 0.099 10.425***
Macrogrow 13,107 0.25 0.216 0.177 −0.155 0.652 3705 0.239 9402 0.254 −4.266***
Inflation 13,107 0.016 0.012 0.023 −0.014 0.059 3705 0.019 9402 0.015 9.077***
Blockshare 13,107 0.403 0.385 0.167 0.096 0.758 3705 0.323 9402 0.434 −36.082***
Topshare 13,107 0.011 0 0.058 0 0.424 3705 0.036 9402 0.001 32.319***
SOE 13,107 0.717 1 0.45 0 1
Marindex 13,107 7.478 7.4 2.201 0.33 11.71 3705 7.978 9402 7.281 16.493***

This table reports the summary statistics for the sample firms between 1998 and 2009 and univariate tests comparing non-SOEs and
SOEs. Variable definitions are in Appendix Table 1. All continuous variables measured at firm level are winsorized at 1% and 99%
levels. ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

SOE and LEV is close to the correlation of − 0.0618 reported by Firth et al. (2008). Such results indicate the
potentially negative effect of state-control on book leverage, rather than the positive effect reported in
numerous previous studies.

4. Empirical results

4.1. Core factor selection using variables in Frank and Goyal (2009)

Employing the BIC approach developed by Schwarz (1978) as our model-selection criteria, we extract
the reliable and important determinants of capital structure from a long list of factors. BIC is one of
the most commonly used model-selection criteria to determine which factors to retain and which to
remove.12
During the model-fitting process, it is possible to increase the likelihood of model simply by adding
more parameters, but doing so might result in over-fitting. The BIC approach resolves such problems by
introducing a penalty term for the number of parameters in the model, specified as follows:

BIC ¼ −2  log‐likelihood þ P  log ðNÞ

12
Please refer to Hastie et al. (2001) for a discussion of the relative merits of numerous approaches to model selection.
 98
Table 3
Correlation matrix between leverage and determinants for Chinese listed firms.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

(1) LEV 1a
(2) MLEV 0.78a

C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

(3) LnAsset 0.03a 0.31a
(4) Age 0.13a 0.15a 0.19a
(5) ROA −0.51a −0.34a 0.25a −0.16a
(6) MB −0.02 −0.44a −0.45a −0.05a −0.03a
(7) Agrow −0.08a −0.03a 0.25a −0.10a 0.38a −0.04a
(8) Capex −0.04a 0.06a 0.16a −0.20a 0.25a −0.14a 0.37a
(9) Tangas 0.14a 0.19a 0.11a −0.07a 0.00 −0.10a −0.11a 0.32a
(10) GAexp 0.22a 0.01 −0.25a 0.08a −0.53a 0.23a −0.30a −0.19a 0.03a
(11) Unique 0.01 0.02a −0.03a −0.03a −0.03a −0.02a −0.02a 0.03a 0.07a −0.01
(12) NDTS 0.06a 0.11a 0.15a 0.02a −0.02a −0.07a −0.18a 0.02 0.70a 0.14a 0.16a
(13) ETR −0.11a 0.02a 0.13a 0.03a 0.26a −0.15a 0.08a 0.04a −0.01 −0.17a −0.03a −0.03a
(14) Stockstd 0.05a 0.03a 0.06a 0.33a −0.08a 0.06a −0.00 −0.12a −0.10a 0.01 0.04a −0.01 −0.04a
(15) Ind_LEV 0.28a 0.36a 0.10a 0.07a −0.08a −0.18a −0.00 0.05a 0.19a 0.01 0.04a 0.11a 0.06a
(16) Ind_MLEV 0.22a 0.49a 0.15a 0.17a −0.10a −0.41a −0.06a 0.04a 0.19a 0.01 0.04a 0.15a 0.09a
(17) Indgrow −0.01 −0.11a 0.09a −0.04a 0.13a 0.17a 0.21a 0.05a −0.04a −0.04a 0.00 −0.04a 0.03a
(18) RegInd 0.04a 0.06a 0.15a −0.01 0.09a −0.00 0.04a 0.08a 0.26a −0.02a −0.14a 0.23a 0.02a
(19) StockRet −0.09a −0.25a 0.00 −0.04a 0.19a 0.28a 0.16a 0.02a −0.01 −0.07a −0.00 −0.02a 0.04a
(20) MarRet −0.02a −0.14a 0.11a 0.21a 0.07a 0.23a 0.10a −0.06a −0.01 −0.03a 0.01 0.03a 0.05a
(21) GDPgrow 0.04a 0.12a 0.16a 0.30a 0.00 −0.10a 0.02 −0.07a 0.05a −0.01 0.01 0.11a 0.12a
(22) Macrogrow 0.02 −0.04a −0.03a −0.08a 0.02a 0.12a 0.02a −0.03a 0.02 0.01 −0.01 0.00 0.01
(23) Inflation 0.03a 0.17a 0.16a 0.27a −0.01 −0.17a −0.01 −0.05a 0.02a −0.02 0.01 0.09a 0.05a
(24) Blockshare −0.14a −0.09a 0.18a −0.27a 0.17a −0.05a 0.07a 0.10a 0.09a −0.08a 0.03a 0.12a 0.04a
(25) Topshare −0.08a −0.08a −0.06a −0.19a 0.08a 0.05a 0.05a 0.06a −0.06a 0.00 0.06a −0.04a −0.02a
(26) SOE −0.07a 0.00 0.20a −0.02a 0.06a −0.12a 0.00 0.06a 0.13a −0.02a 0.02a 0.12a 0.04a
(27) Marindex −0.02a 0.04a 0.22a 0.36a 0.04a −0.05a −0.00 −0.09a −0.11a 0.04a 0.01 0.02a 0.08a

Variable definitions are in Appendix Table 1. All continuous variables measured at firm level are winsorized at 1% and 99% levels.
a
Indicates significance at the 1% level.
Table 3 (continued)

(14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26)

(1) LEV
(2) MLEV

C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

(3) LnAsset
(4) Age
(5) ROA
(6) MB
(7) Agrow
(8) Capex
(9) Tangas
(10) GAexp
(11) Unique
(12) NDTS
(13) ETR
(14) Stockstd
(15) Ind_LEV −0.07a
(16) Ind_MLEV −0.01 0.75a
(17) Indgrow 0.08a 0.01 −0.20a
(18) RegInd −0.02a 0.08a 0.08a 0.06a
(19) StockRet −0.17a −0.07a −0.32a 0.28a −0.00
(20) MarRet 0.31a −0.06a −0.25a 0.34a 0.01 0.68a
(21) GDPgrow 0.32a 0.11a 0.26a 0.06a 0.03a 0.21a 0.63a
(22) Macrogrow −0.12a 0.04a −0.07a 0.10a −0.00 0.25a 0.23a 0.15a
(23) Inflation 0.50a 0.11a 0.34a −0.04a 0.03a −0.43a −0.01 0.56a 0.05a
(24) Blockshare −0.20a −0.03a −0.03a 0.05a 0.05a 0.01 −0.12a −0.14a 0.05a −0.11a
(25) Topshare 0.14a −0.09a −0.03a −0.02a −0.05a 0.01 0.07a 0.05a −0.07a 0.07a −0.12a
(26) SOE −0.12a 0.01 −0.02a 0.03a 0.12a 0.01 −0.07a −0.09a 0.04a −0.08a 0.30a −0.27a
(27) Marindex 0.35a −0.03a 0.10a −0.01 −0.01 0.01 0.26a 0.32a −0.07a 0.29a −0.13a 0.20a −0.14a

99
100 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

where P is the number of parameters and N is the number of observations in a fitted model. A smaller BIC
is optimal. BIC decreases as the log-likelihood increases, and increases as the number of parameters or the
number of observations increases.
Our selection process is identical to that used by Frank and Goyal (2009): (1) regressing financial
leverage on all factors, and recording the coefficient estimate and the t statistic of each factor; (2) dropping
the factor with the lowest t statistic and regressing financial leverage on the remaining factors; and
(3) repeat Step (2) and remove the factors individually until only one factor remains. We record the BIC
value for each model, and the model with the minimum BIC was chosen as the optimal model.
This process is first applied to the overall sample. We subsequently split the overall sample randomly into
10 equal subsamples and repeat the selection process on each subsample. Finally, we repeat the process on
each of the annual subsamples. For each sample, we generate the optimal model based on the minimum BIC.
The rule of thumb introduced by Frank and Goyal (2009) identifies a factor as a core factor if it satisfies the
following conditions: (1) included in the minimum BIC specification on the overall sample; (2) included in at
least 50% of the minimum BIC specifications on random subsamples, and the coefficient estimate has a
consistent sign across these specifications; and (3) included in at least 50% of the minimum BIC specifications
on annual subsamples, and the coefficient estimate has a consistent sign across these specifications.

Table 4
Core factor selection using book leverage for Chinese listed firms (without variables of Chinese institutions).

Coefficient t-Statistics Own R2 Cumulative R2 BIC Group Group Year Year

positive negative positive negative
(%) (%) (%) (%)

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

ROA −1.080 −21.018 0.256 0.256 −10,679.251 0 100 0 100

Ind_LEV 0.716 16.575 0.079 0.313 −11,722.433 100 0 100 0
Agrow 0.082 7.796 0.007 0.326 −11,963.429 100 0 75 0
Tangas 0.123 5.400 0.020 0.340 −12,211.812 100 0 75 0
LnAsset 0.019 4.992 0.001 0.349 −12,393.975 100 0 83 0
Indgrow 0.151 4.794 0.000 0.351 −12,414.632 30 0 17 0
NDTS −0.969 −4.096 0.004 0.354 −12,473.793 0 50 0 42
Stockstd 0.457 1.598 0.002 0.354 −12,473.073 10 0 42 0
Inflation −0.274 −1.622 0.001 0.355 −12,480.040 0 20
MarRet −0.002 −0.834 0.000 0.355 −12,472.623 0 20
GDPgrow 0.302 1.318 0.001 0.356 −12,467.260 0 0
MB 0.011 2.435 0.000 0.361 −12,571.821 50 0 50 8
GAexp −0.223 −2.465 0.046 0.362 −12,590.016 0 10 0 42
Macrogrow 0.029 2.115 0.000 0.363 −12,593.371 0 0
Age 0.002 1.774 0.018 0.364 −12,610.955 10 0 42 0
RegInd 0.017 1.511 0.002 0.365 −12,614.208 10 0 0 0
Capex −0.032 −1.177 0.001 0.365 −12,607.754 0 0 8 0
ETR 0.010 0.729 0.011 0.365 −12,599.673 0 0 0 0
Unique −0.003 −0.421 0.000 0.365 −12,590.921 0 0 0 0
StockRet −0.002 −0.333 0.008 0.365 −12,591.366 0 0 33 17

This table reports the results of core factor selection using book leverage (LEV). The definitions of all factors are provided in
Appendix Table 1. Variables of Chinese institutions (SOE, Blockshare, Topshare, and Marindex) are excluded to make results
comparable with the U.S. evidence. All continuous variables measured at firm level are winsorized at 1% and 99% levels. We start
with a regression of book leverage on all factors and report all statistics at the bottom of the table. Column (1) reports the coefficient
estimate of the factor with the lowest t-statistic. Column (2) reports the t-statistic of the worst-performing factor. Column (3)
reports the own R2 from univariate regression of leverage on this factor. Column (4) reports the cumulative R2 of the regression that
include the listed variable and all variables listed above it. Column (5) reports the Bayesian Information Criterion. The standard
errors are adjusted for clustering at both the firm level and the year level. We then remove this worst-performing factor and regress
leverage against the remaining variables. The corresponding statistics of this regression are reported in the second to the bottom
row. We continue in this manner up the table. The percentage of cases that a certain factor has a positive coefficient and is included
in the minimum BIC specification in 10 equal-sized random sub-samples is reported in Column (6). The percentage of cases that a
certain factor has a negative coefficient and is included in the minimum BIC specification in 10 equal-sized random sub-samples is
reported in Column (7). The percentage of cases that a certain factor has a positive coefficient and is included in the minimum BIC
specification in twelve annual sub-samples is reported in Column (8). The percentage of cases that a certain factor has a negative
coefficient and is included in the minimum BIC specification in twelve annual sub-samples is reported in Column (9).
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 101

Table 5
Core factor selection using book leverage for Chinese listed firms.

Coefficient t-Statistics Own R2 Cumulative R2 BIC Group Group Year Year

positive negative positive negative
(%) (%) (%) (%)

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

ROA −1.080 −21.018 0.256 0.256 −10,679.251 0 100 0 100

Ind_LEV 0.716 16.575 0.079 0.313 −11,722.433 100 0 92 0
Agrow 0.082 7.796 0.007 0.326 −11,963.429 100 0 67 0
Tangas 0.123 5.400 0.020 0.340 −12,211.812 100 0 75 0
LnAsset 0.019 4.992 0.001 0.349 −12,393.975 100 0 83 0
SOE −0.031 −4.292 0.005 0.354 −12,490.167 0 60 0 58
Indgrow 0.158 3.936 0.000 0.356 −12,513.833 40 0 25 0
NDTS −0.958 −3.989 0.004 0.359 −12,571.987 0 50 0 42
Blockshare −0.063 −3.579 0.019 0.362 −12,619.952 0 60 0 50
Topshare −0.114 −2.553 0.007 0.363 −12,633.575 0 10 0 33
MB 0.010 2.127 0.000 0.368 −12,719.379 60 0 50 8
GAexp −0.187 −2.126 0.046 0.369 −12,729.611 0 40 0 42
MarRet −0.008 −1.838 0.000 0.370 −12,742.541 0 30
Stockstd 0.169 0.407 0.002 0.370 −12,734.131 30 0 42 0
Inflation −0.280 −1.352 0.001 0.371 −12,741.220 0 30
GDPgrow 0.756 2.279 0.001 0.372 −12,756.090 30 0
Macrogrow 0.036 1.923 0.000 0.373 −12,767.486 20 0
RegInd 0.019 1.768 0.002 0.374 −12,773.450 20 0 0 0
Capex −0.032 −1.216 0.001 0.374 −12,766.970 0 0 8 0
ETR 0.013 0.982 0.011 0.374 −12,759.802 10 0 8 0
Age 0.001 0.845 0.018 0.374 −12,764.788 10 0 42 0
Marindex −0.001 −0.532 0.001 0.374 −12,756.429 0 10 0 0
StockRet −0.001 −0.127 0.008 0.374 −12,756.489 10 0 33 17
Unique −0.001 −0.081 0.000 0.374 −12,747.035 10 0 0 0

This table reports the results of core factor selection using book leverage (LEV). The definitions of all factors are provided in
Appendix Table 1. All continuous variables measured at firm level are winsorized at 1% and 99% levels. We start with a regression of
book leverage on all factors and report all statistics at the bottom of the table. Column (1) reports the coefficient estimate of the
factor with the lowest t-statistic. Column (2) reports the t-statistic of the worst-performing factor. Column (3) reports the own R2
from univariate regression of leverage on this factor. Column (4) reports the cumulative R2 of the regression that include the listed
variable and all variables listed above it. Column (5) reports the Bayesian Information Criterion. The standard errors are adjusted for
clustering at both the firm level and the year level. We then remove this worst-performing factor and regress leverage against the
remaining variables. The corresponding statistics of this regression are reported in the second to the bottom row. We continue in this
manner up the table. The percentage of cases that a certain factor has a positive coefficient and is included in the minimum BIC
specification in 10 equal-sized random sub-samples is reported in Column (6). The percentage of cases that a certain factor has a
negative coefficient and is included in the minimum BIC specification in 10 equal-sized random sub-samples is reported in Column
(7). The percentage of cases that a certain factor has a positive coefficient and is included in the minimum BIC specification in twelve
annual sub-samples is reported in Column (8). The percentage of cases that a certain factor has a negative coefficient and is included
in the minimum BIC specification in twelve annual sub-samples is reported in Column (9).

We intend to report the results of Chinese firms directly comparable to the existing results for the
U.S. firms. Therefore, we start the selection process using only the variables included by Frank and Goyal
(2009) and report our results in Table 4, where book-value based leverage is used as the dependent
variable. In accordance with Petersen (2009), we correct the standard errors by clustering at both the
firm level and the year level. Columns (1) to (5) present the results of the selection process from
the overall sample. Beginning with the bottom of the table, we regress book leverage on all factors.
Columns (4) and (5) report the R2 and the BIC of the regression, respectively. Columns (1) and (2)
report the coefficient estimate and the t statistic of the factor with the lowest t statistic. Column (3)
reports the R2 from univariate regression of book leverage on this factor. In the second row from the
bottom, we subsequently drop this factor and rerun the regression, reporting the R2 in Column (4) and
the BIC in Column (5). Similarly, the coefficient estimate and the t statistic of the factor performing
worst in this new regression are reported in Columns (1) and (2), and the R2 from univariate regression
of book leverage on this factor is reported in Column (3). We repeat the process all the way up the table.
Columns (6) and (7) present the summary results of the selection process on the 10 equal-sized random
102 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

subsamples. The percentage of cases in which the factor is included in the model with minimum BIC and
has a positive coefficient estimate is reported in Column (6), and the percentage of cases in which the
factor is included in the model with minimum BIC and has a negative coefficient estimate is reported
in Column (7). Columns (8) and (9) present the summary results of the selection process on the annual
subsamples. Similarly, the percentage of cases in which the factor is included in the model with
minimum BIC and has a positive or negative coefficient estimate is reported in Column (8) and Column
(9), respectively.
As shown at the bottom of Table 4, the R2 and BIC in the overall sample regression of leverage on all
factors are 0.365 and − 12591.366, respectively, and StockRet performs the worst among all
determinants, with a t statistic of − 0.333. We remove this variable and regress leverage on the
remaining factors. The BIC becomes − 12,590.921 and the factor with the lowest t statistic is unique in
this case. Following this pattern, we run a total of 20 regressions and ROA is the last remaining factor.
We identify the specification with the lowest BIC (− 12,614.208) among all the regressions as the
optimal specification. The variables included in this specification are ROA, industry median leverage,
asset growth, tangibility, log of total assets, industry-median asset growth, NDTS, stock-standard
deviation, inflation, market return, GDP growth, MB ratio, general and administrative expense, growth
of aggregate industrial-firm profits before tax, firm age, and dummy of regulated industry. We further
run regressions on the 10 equal-sized random subsamples and on the annual subsamples. We determine
the following five variables to satisfy the standards of core factors: (1) ROA; (2) industry median
leverage (Ind_LEV); (3) asset growth (Agrow); (4) tangibility (Tangas); and (5) log of total assets
(LnAsset). Although MB ratio is included in the minimum BIC specification on the overall sample, in 50%
of the minimum BIC specifications on random subsamples and on annual subsamples, it could not
be selected as a core factor because of its inconsistent sign of coefficient estimates across annual
subsamples.
Four of our five core factors (ROA; Ind_LEV; Tangas; LnAsset) are among the core factors of the U.S.
firms13 and the reliable determinants of leverage for international firms (Öztekin, forthcoming).14 The
coefficients of the four core factors also have the same signs as those reported by Frank and Goyal (2009)
and Öztekin (forthcoming).
Profitability is the most critical core factor, as shown in Table 4, with a coefficient of − 1.08 and an
own-R2 of 0.256. The coefficient is also much greater than the coefficient of − 0.2268 for firms from
developing economies as reported by Fan et al. (2012). Such dramatic differences can again be caused by
the severe financial constraints of Chinese listed firms in issuing equity or borrowing. Consequently,
internal capital accumulation is far more critical in Chinese firms.
The second most critical core factor for Chinese firms is industry median leverage, which exhibits a
coefficient of 0.716 and an own-R2 of 0.079. Identified as the third most crucial core factor in the Chinese
context, asset growth has a coefficient of 0.082 and an own-R2 of 0.007. By comparison, asset growth is not
selected as a core factor for the U.S. firms. The importance of asset growth in Chinese listed firms reflects
the equity financing constraints in China; thus, rapidly growing firms must finance primarily through
debts, forcing leverage to increase. This is why asset growth explains leverage more effectively than the
MB ratio does in China, although both are measures of growth opportunities. Tangibility exhibits a
coefficient of 0.123 for Chinese firms, similar to the coefficient of 0.1171 for firms from developing
economies (Fan et al., 2012). The last core factor, LnAsset, has a coefficient of 0.019 and an own-R2 of
0.001. Regardless of its importance for the U.S. firms or international firms, inflation is not identified as a
core factor in the capital structure decisions of Chinese firms.
Using a sample of international firms from 37 countries, Gungoraydinoglu and Öztekin (2011) report
that ROA has an explanatory power of 12.07% out of all variations explained by their full leverage model,
whereas industry median leverage has a much greater explanatory power of 27.03%. The results suggest

13
The core factors for market leverage (TDM) model reported by Frank and Goyal (2009) comprise (1) industry median leverage,
(2) tangibility, (3) MB asset ratio, (4) profitability, (5) log of assets, and (6) expected inflation. They also state that the core factors
for book leverage (TDA) model include (1) industry median leverage, (2) tangibility, (3) profitability, and (4) net operating loss
carry-forwards, but they do not report the corresponding table.
14
Öztekin (forthcoming) report that the reliable determinants for leverage are firm size, tangibility, industry leverage, profits, and
inflation in an international sample of firms from 37 countries.
Table 6
By year and ownership regression of model with only core factors for Chinese listed firms.

By year By ownership Overall

sample

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 SOEs Non-SOEs

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

− − − − − − − − − − − − − − −

C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

ROA
0.940*** 1.127*** 1.209*** 1.120*** 1.226*** 1.458*** 1.259*** 1.331*** 1.376*** 1.062*** 0.963*** 1.009*** 1.118*** 1.237*** 1.175***
(− (− (− (−9.37) (− (− (− (− (− (−9.12) (− (− (− (−15.36) (−
12.48) 11.99) 10.18) 13.40) 17.54) 15.05) 17.49) 14.82) 11.76) 11.30) 17.79) 20.74)
Ind_LEV 0.365*** 0.401*** 0.565*** 0.559*** 0.628*** 0.611*** 0.611*** 0.571*** 0.526*** 0.586*** 0.547*** 0.558*** 0.619*** 0.528*** 0.591***
(2.76) (3.54) (4.85) (5.92) (7.33) (7.98) (7.18) (6.86) (6.68) (8.72) (9.02) (9.38) (14.07) (7.74) (15.03)
Agrow 0.064*** 0.047*** 0.034* 0.067*** 0.095*** 0.191*** 0.090*** 0.085*** 0.081*** 0.034** 0.059*** 0.071*** 0.081*** 0.068*** 0.077***
(3.24) (2.60) (1.92) (2.80) (4.78) (8.74) (3.92) (3.41) (3.40) (2.48) (3.58) (4.14) (6.28) (4.57) (6.63)
Tangas −0.026 −0.048 0.002 0.084*** 0.127*** 0.144*** 0.153*** 0.197*** 0.179*** 0.161*** 0.154*** 0.177*** 0.120*** 0.117*** 0.122***
(−0.84) (−1.51) (0.07) (3.01) (4.57) (5.40) (5.48) (7.11) (5.93) (5.88) (6.04) (6.43) (4.99) (3.41) (5.41)
LnAsset 0.036*** 0.036*** 0.024*** 0.018*** 0.021*** 0.015** 0.022*** 0.027*** 0.012 0.026*** 0.040*** 0.036*** 0.025*** 0.013* 0.022***
(5.74) (5.95) (4.05) (2.64) (3.59) (2.57) (3.65) (4.95) (1.59) (5.40) (9.90) (8.38) (7.99) (1.69) (6.45)
SOE −0.015 −0.005 −0.026* −0.028* − −0.027** − − − −0.018* − − −
0.035*** 0.038*** 0.046*** 0.038*** 0.031*** 0.023*** 0.024***
(−1.14) (−0.38) (−1.92) (−1.92) (−2.89) (−2.28) (−3.42) (−4.30) (−3.26) (−1.80) (−3.54) (−2.59) (−3.57)
Blockshare − − −0.071** − − − −0.063** − − −0.051* −0.055** −0.056** − −0.050 −
0.078*** 0.104*** 0.113*** 0.119*** 0.091*** 0.095*** 0.106*** 0.074*** 0.067***
(−2.81) (−3.59) (−2.57) (−3.81) (−4.35) (−3.08) (−2.13) (−2.99) (−2.98) (−1.72) (−2.09) (−2.11) (−4.10) (−1.12) (−3.75)
Constant − − −0.299** −0.196 −0.288** −0.190 − − −0.083 − − − − −0.127 −
0.512*** 0.486*** 0.327*** 0.426*** 0.416*** 0.719*** 0.661*** 0.416*** 0.326***
(−3.93) (−3.79) (−2.42) (−1.34) (−2.29) (−1.53) (−2.59) (−3.62) (−0.53) (−4.22) (−8.79) (−7.42) (−5.85) (−0.71) (−4.04)
Observations 678 805 901 1023 1087 1151 1211 1292 1064 1137 1289 1469 9402 3705 13107
R2 0.32 0.34 0.34 0.33 0.36 0.44 0.38 0.41 0.38 0.32 0.40 0.35 0.35 0.37 0.36
Adj. R2 0.31 0.33 0.33 0.33 0.36 0.44 0.38 0.41 0.38 0.32 0.39 0.35 0.35 0.37 0.36
F test 37.67*** 36.54*** 28.57*** 37.61*** 56.49*** 97.67*** 54.44*** 92.34*** 72.24*** 56.80*** 101.5*** 90.99*** 583.2*** 185.9*** 638.3***

This table reports the regression results of book leverage (LEV) on core factors only. Explanatory variables include seven core factors: ROA, Ind_LEV, Agrow, Tangas, LnAsset, SOE and Blockshare.
The factors are described in Appendix Table 1. All continuous variables measured at firm level are winsorized at 1% and 99% levels. Columns (1) to (12) report the results on the annual sub-samples.
Columns (13) and (14) report the results on the subsample of SOEs and the subsample of non-SOEs, respectively. Column (15) reports the results on overall sample. t-Statistics are reported in
parentheses and are computed with robust standard errors adjusted for clustering at the firm level through Columns (1) to (12) and adjusted for clustering at both the firm level and the year level
through Columns (13) to (15). ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

103
104 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

that industry leverage is a determinant of leverage overall more important than profitability. As reported
above, we find that profitability has exceptionally high explanatory power for book leverage in Chinese
listed firms, while industry median leverage, tangibility, and total assets have substantially lower
explanatory power. Such divergence between Chinese listed firms and international firms again indicates
that internal capital accumulation of corporations is far more critical in China than in other countries.

4.2. Core factor selection with additional variables regarding Chinese institutional features

We then add the four variables related to Chinese institutional features into the book leverage model
and conduct the process of selecting core factors again. As shown at the bottom of Table 5, the R2 in
the regression of leverage on all factors improves to 0.374 (from 0.365 in Table 4), and the BIC decreases to
− 12,747.035 (from − 12,591.366 in Table 4). The worst performing variable among all determinants is
the dummy of industry uniqueness (unique), which has a t statistic of − 0.081. After removing this
variable, BIC decreases to − 12,756.489 and the factor with the lowest t statistic becomes stock return
(StockRet). We repeat this method and run a total of 24 regressions. We identify the optimal specification
with the lowest BIC (− 12,773.450) among all the regressions. Compared with the optimal specification in
Table 4, the optimal specification in Table 5 drops age, but adds three new variables regarding Chinese
institutional features, (i.e., SOE, Blockshare, and Topshare).
Following the standards of core factors, we identify a total of seven core factors: (1) ROA; (2) industry
median leverage (Ind_LEV); (3) asset growth (Agrow); (4) tangibility (Tangas); (5) log of total assets
(LnAsset); (6) state-control dummy (SOE); and (7) ratio of shares held by the largest shareholder
(Blockshare). The five core factors selected in Table 4 remain in our new set of core factors after adding
variables regarding Chinese institutional features to the model, and their ordering sequence does not
change. The two new core factors, state-control dummy and the ratio of shares held by the largest
shareholder, both exert negative effects on book leverage, and respectively have an own-R2 of 0.005 and
0.019. Ownership structure, in either ownership nature or percentage holdings, exerts a reliable and
crucial effect on the capital structure of Chinese listed firms.

4.3. Regression analysis of core factors

We next regress book leverage on the seven core factors only. In addition to the overall sample
analysis, we estimate the core factor model of leverage in annual subsamples and in the subsamples
according to ownership. The estimates on annual subsamples are reported in Columns (1) to (12) of
Table 6; the estimates on the subsamples split by ownership are reported in Columns (13) and (14); and
the estimates on the overall sample are reported in Column (15). The standard errors are adjusted for
clustering at both the firm level and the year level when calculating t statistics in Columns (13) to (15),
and robust standard errors clustered at the firm level are shown in Columns (1) to (12).
As shown in Column (15), the seven core factors explain approximately 36% of the variation in book
leverage for the overall sample. Their explanatory ability is consistent across years within the sample
period and across the subsamples of diverse ownership. In addition, the ability of the core factors to
explain book leverage in China is much greater than that in the United States during the same period,
which is only approximately 21.2% in the early 2000s, as reported by Frank and Goyal (2009). All of the
coefficient estimates of the seven core factors exhibit the signs indicated by the core factor selection and
are statistically significant at the 1% level when using the overall sample.
Profitability, measured by ROA, is negatively and significantly associated with book leverage, consistent
with existing results in the literature. Its coefficient is − 1.175, approximately five times the coefficient of
− 0.25 for the U.S. firms (Frank and Goyal, 2009) or the coefficient of − 0.2268 for firms from developing
economies (Fan et al., 2012). As shown in Columns (1) to (14), ROA exhibits a consistent sign across years
for both SOEs and non-SOEs. Moreover, ROA is significant at the 1% level in all cases. These findings
confirm profitability as the most crucial determinant of capital structure for Chinese listed firms. The ROA
coefficient in the SOE subsample is − 1.118, larger15 than the coefficient of − 1.237 in the subsample of

15
The difference is statistically significant at the 10% level.
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 105

Table 7
Reintroducing minor factors for Chinese listed firms.

LEV MLEV

Overall sample SOEs Non-SOEs Overall sample SOEs Non-SOEs

(1) (2) (3) (4) (5) (6)

Core factors
ROA −1.215*** −1.151*** −1.259*** −0.629*** −0.633*** −0.588***
(−18.88) (−18.03) (−12.16) (−9.33) (−10.59) (−6.92)
Ind_LEV 0.587*** 0.639*** 0.458***
(15.22) (14.74) (6.61)
Ind_MLEV 0.546*** 0.573*** 0.455***
(11.62) (12.78) (5.71)
Agrow 0.067*** 0.064*** 0.067*** 0.032*** 0.032*** 0.026***
(4.89) (3.87) (5.30) (3.48) (3.01) (3.30)
Tangas 0.183*** 0.190*** 0.154*** 0.110*** 0.118*** 0.088***
(5.64) (5.20) (3.48) (5.36) (4.89) (4.09)
LnAsset 0.032*** 0.034*** 0.028*** 0.033*** 0.033*** 0.034***
(8.14) (8.31) (3.85) (9.53) (10.36) (5.66)
SOE −0.029*** −0.013***
(−4.22) (−2.77)
Blockshare −0.071*** −0.079*** −0.025 −0.059*** −0.063*** −0.026
(−4.06) (−4.12) (−0.59) (−5.14) (−5.11) (−1.21)

Minor factors
Age 0.001 0.000 0.004** −0.000 −0.001 0.001
(0.95) (0.01) (2.08) (−0.47) (−1.07) (1.40)
MB 0.012** 0.007* 0.018*** −0.013*** −0.016*** −0.009***
(2.41) (1.68) (2.64) (−6.71) (−6.45) (−3.61)
Capex −0.027 −0.006 −0.071 −0.000 0.012 −0.029
(−1.03) (−0.18) (−1.30) (−0.01) (0.74) (−1.64)
Unique −0.001 0.004 −0.013 0.002 0.003 −0.003
(−0.08) (0.54) (−1.02) (0.42) (0.65) (−0.42)
GAexp −0.200** −0.123 −0.378** −0.325*** −0.290*** −0.370***
(−2.25) (−1.14) (−2.04) (−5.51) (−4.86) (−3.38)
NDTS −0.881*** −1.089*** −0.208 −0.537*** −0.642*** −0.167
(−3.36) (−3.79) (−0.49) (−3.48) (−3.34) (−0.71)
ETR 0.012 0.015 0.000 0.024** 0.025** 0.019
(0.95) (1.15) (0.02) (2.47) (2.47) (1.61)
Stockstd 1.139*** 1.967*** −0.484 0.293 0.727*** −0.689
(3.07) (5.42) (−0.77) (0.91) (2.81) (−1.43)
Indgrow 0.173*** 0.172*** 0.176** 0.057 0.077** 0.019
(3.62) (3.63) (2.25) (1.44) (2.28) (0.31)
RegInd 0.019* 0.010 0.083** 0.006 −0.000 0.059***
(1.72) (0.93) (2.53) (0.92) (−0.06) (3.05)
StockRet −0.001 0.010* −0.018* −0.014*** −0.010** −0.021***
(−0.13) (1.79) (−1.91) (−2.81) (−2.11) (−3.48)
MarRet −0.024*** −0.022*** −0.035*** −0.005 −0.003 −0.014
(−5.22) (−3.67) (−4.77) (−0.90) (−0.65) (−1.45)
GDPgrow 0.803*** 0.308 2.027*** 0.344 0.102 1.076**
(2.75) (0.92) (6.17) (1.04) (0.34) (2.16)
Macrogrow 0.038* 0.032* 0.050** 0.026 0.023 0.037*
(1.77) (1.65) (2.25) (1.38) (1.29) (1.80)
Inflation −0.800*** −0.651*** −1.166*** −0.509** −0.471** −0.652*
(−3.86) (−2.81) (−5.27) (−2.14) (−2.24) (−1.90)
Topshare −0.071* −0.212 0.004 −0.043 −0.043 −0.011
(−1.73) (−1.49) (0.08) (−1.49) (−0.33) (−0.41)
Marindex −0.001 −0.001 0.001 −0.001 −0.002 0.001
(−0.53) (−0.59) (0.46) (−0.99) (−1.37) (0.89)
Constant −0.660*** −0.694*** −0.687*** −0.609*** −0.604*** −0.710***
(−7.14) (−7.54) (−4.44) (−6.90) (−7.52) (−4.63)
Observations 13107 9402 3705 13107 9402 3705

(continued on next page)

106 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

Table 7 (continued)
LEV MLEV

Overall sample SOEs Non-SOEs Overall sample SOEs Non-SOEs

(1) (2) (3) (4) (5) (6)

Minor factors
R2 0.37 0.37 0.41 0.49 0.51 0.49
Adj. R2 0.37 0.36 0.40 0.49 0.51 0.49
F test 225.8*** 184.9*** 74.16*** 428.6*** 335.3*** 136.0***

This table reports the results from regressions of leverage on all factors including both core factors and minor factors. Leverage is
defined as LEV (book leverage) in Columns (1) to (3) and as MLEV (market leverage) in Columns (4) to (6). The factors are described
in Appendix Table 1. All continuous variables measured at firm level are winsorized at 1% and 99% levels. t-Statistics, computed with
robust standard errors adjusted for clustering at both the firm level and the year level, are reported in parentheses. ***, **, and *
indicate significance at the 1%, 5%, and 10% levels, respectively.

non-SOEs. This difference suggests that state-controlled listed firms face fewer financial constraints than
non-SOEs do; therefore, their leverage is less dependent on internal capital accumulation.
Industry median leverage (Ind_LEV) exhibits consistent positive and significant coefficients across
various samples. In the full sample, its coefficient is 0.591, slightly lower than the coefficient of 0.661 in the
full sample regression of core factors for the U.S. firms (Frank and Goyal, 2009). This finding is also
consistent with Li et al. (2009), indicating that target-leverage level and industry factors are crucial in the
capital structure decisions of Chinese firms.
Asset growth (Agrow) exhibits consistent positive and significant coefficients in the subsamples across
years and diverse ownership, suggesting that rapidly growing firms tend to use debt to finance their
growth, given that equity financing is highly constrained in China.
Asset tangibility (Tangas) and log of total assets (LnAsset) are positively and significantly associated
with book leverage in most years for both SOEs and non-SOEs. The results are consistent with the majority
of previous studies. The coefficients of Tangas and LnAsset from the full sample regression are 0.122 and
0.022, respectively, which are largely close to the numbers of the U.S. firms (0.136 and 0.01) or firms from
developing economies (0.1171 and 0.0109) as reported by Fan et al. (2012).
The state-control dummy (SOE) exhibits a coefficient of − 0.024 in the full sample regression,
suggesting that state-controlled listed firms tend to have lower debt balances amounting to 2.4% total
assets. The coefficients of SOE are consistently negative and significant across all years, other than 1998
and 1999. Such findings are somewhat surprising given that numerous previous studies (Dewenter and
Malatesta, 2001; Li et al., 2009) have asserted that SOEs are more levered because of their easy access to
bank loans. Nevertheless, our findings of lower leverage in SOEs are consistent with Firth et al. (2008). We
argue that the lower leverage of SOEs might simply reflect their easy access to equity issuance.
The ratio of shares held by the largest shareholder (Blockshare) exhibits a coefficient of − 0.067 in the
full sample regression of book leverage. The negative effect is significant across all years, suggesting that
this factor exerts a crucial effect on a firm's capital structure decision. The relation between this factor and
book leverage is significant for SOEs, but insignificant for non-SOEs. Such difference lends support to our
argument that lower leverage of SOEs reflects their easy access to equity issuance, in that higher state
ownership can help firms obtain easier approval of equity issuance.
These results are fairly consistent with those shown in core-factor selection. Profitability, industry median
leverage, asset growth, asset tangibility, firm size, state-control dummy, and the largest shareholdings play a
consistently substantial role in firms' capital structure decisions and are reliable and important determinants
of capital structure in China.

4.4. Regression analysis including minor factors

In this section, we reintroduce the minor factors omitted in the core-factor selection process, so that
measures of leverage are regressed on all factors. How the minor factors perform with the core factors
controlled is intriguing, because they affect the sign and significance of core factors, have additional ability
to explain variation of leverage, or are relevant to policy making (Frank and Goyal, 2009). Columns (1) to
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 107

(3) of Table 7 present the results of book leverage regressions, and Columns (4) to (6) report the results of
market leverage regressions. For either leverage, we estimate regressions in the overall sample, the
subsample of SOEs, and the subsample of non-SOEs. Our results in Table 7 show that the estimates of seven
core factors remain relatively stable in the regressions of both leverages after including minor factors.
Therefore, we focus on discussing minor factors in the remainder of this section.
The relationship between firm age and book leverage is insignificant in the overall sample and the
subsample of SOEs, whereas it is positive and significant in the subsample of non-SOEs. Firm age is
insignificant in all regressions of market leverage.
As the common proxy for growth opportunity in the literature, the MB ratio exhibits a coefficient of
0.012 (significant at the 5% level) in the book leverage regression, as shown in Column (1) of Table 7. The
positive effect of MB is much stronger than the effect for the U.S. firms given the coefficient of only 0.002
(Frank and Goyal, 2009). Such a strong positive relation might reflect the financial constraints of Chinese
listed firms in raising equity because of intense governmental scrutiny. However, our results are
inconsistent with certain previous findings regarding Chinese firms (Huang and Song, 2006; Bhabra et al.,
2008). The positive effect of MB is weaker in the subsample of SOEs with a coefficient of 0.007, whereas it
is stronger in the subsample of non-SOEs with a coefficient of 0.018. The coefficients of the MB ratio
become negative and significant in all three regressions of market leverage, whereas the positive sign of
coefficients on asset growth remains unchanged. Such negative coefficients of the MB ratio in the
regressions of market leverage can be caused by the mechanically negative relationship between them.
In addition to asset tangibility, we include general and administrative expenses (GAexp) as another
proxy for the nature of assets. Except for the subsample of SOEs, the coefficients of the GAexp variable are
negative and significant in regressions of book leverage, and such a negative association is even stronger in

Table 8
Further tests of the effects of state-control.

Panel A: IPO setting Panel B: loan supply shock in 2009 Panel C: SEO setting

Dep. var. = LEV Dep. var. = ΔLEV Dep. var. = RS

SOE 0.003 SOE 0.006 SOE 0.435***

(0.25) (1.17) (4.49)
ROA −1.105*** ΔROA −0.343*** ROA 6.557***
(−14.48) (−6.33) (5.76)
Ind_LEV 0.501*** ΔInd_LEV 0.120 Ind_LEV −2.690***
(7.82) (1.18) (−4.07)
Agrow 0.158*** ΔAgrow −0.012* Agrow 0.261**
(5.06) (−1.66) (2.38)
Tangas 0.163*** ΔTangas 0.103** Tangas 0.208
(5.64) (2.20) (1.01)
LnAsset 0.021*** Δ LnAsset 0.085*** LnAsset −0.274***
(3.99) (4.73) (−4.65)
Blockshare −0.037 ΔBlockshare 0.141* Blockshare 0.566**
(−1.32) (1.71) (2.37)
LEV 1.085***
(5.90)
Constant −0.351*** Constant −0.012** Constant 3.359***
(−3.22) (−2.34) (2.65)
Observations 1077 Observations 1378 Observations 13107
R2 0.38 R2 0.12 Pseudo R2 0.12
Adj. R2 0.37 Adj. R2 0.12
F test 70.74*** F test 10.56*** χ2 test 503.38***

This table reports the results explaining the negative effects of state-control on leverage. In Panel A, book leverage is regressed on
SOE and the other six core factors (ROA, Ind_LEV, Agrow, Tangas, LnAsset, and Blockshare), and the observations are the listed firms
in the years immediately following their IPOs. In Panel B, the change of book leverage in year 2009 is regressed on SOE and the
change of the other six core factors in 2009. In Panel C, we run a Probit regression, where the dependent variable is a dummy
indicating a rights issue (RS) in the following year, and the independent variables include ROA, Ind_LEV, Agrow, Tangas, LnAsset,
Blockshare and LEV. All continuous variables measured at firm level are winsorized at 1% and 99% levels. Δ denotes the change in the
variable. t-Statistics are reported in parentheses. In Panel A and B, t-statistics are computed with robust standard errors adjusting for
clustering at the firm level, and in Panel C t-statistics are computed with robust standard errors adjusting for clustering at both the
firm level and the year level. ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.
108 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

regressions of market leverage. Such results are consistent with the evidence of Frank and Goyal (2009).
However, the industry uniqueness dummy appears insignificant in all six models.
NDTS is negatively and significantly associated with both book leverage and market leverage in the
overall sample regressions. Effective tax rate (ETR) is positively and significantly associated only with
market leverage in the overall sample regression, but not with book leverage. The negative relationships
between NDTS and both measures of leverage become more pronounced in the subsample of SOEs,
although it disappears in the subsample of non-SOEs. We observe a similar positive relationship between
ETR and market leverage for SOEs only. Such patterns can be caused by favorable loan rationing to SOEs by
state-controlled banks in China (Allen et al., 2005). Because non-SOEs in China often have difficulty
accessing bank loans, tax benefits have become a minor consideration when non-SOEs make capital
structure decisions.
Firm risk proxied by the standard deviation of stock returns (Stockstd) exhibits a coefficient of 1.139
(significant at the 1% level) in the overall sample regression of book leverage, consistent with the findings
of Qian et al. (2009). The positive effect of Stockstd in our sample is opposite to the negative and
significant effect reported for the U.S. firms. Regardless of whether we use book leverage or market
leverage, the relationship between Stockstd and leverage remains significantly positive for SOEs, whereas
it becomes negative (albeit insignificant) for non-SOEs. These patterns can again be explained by the high
accessibility of SOEs to bank loans (Brandt and Li, 2003). Given the implicit or explicit guarantees from the
state, risky SOEs can increase borrowing to avoid financial distress costs, whereas risky non-SOEs often
encounter difficulty in obtaining loans without support from the state.
Stock market conditions also appear to affect the leverage choice of Chinese listed firms. The
cumulative stock return (StockRet) exhibits an insignificant effect on book leverage; however, it is
positively associated with book leverage of SOEs, but negatively associated with book leverage of
non-SOEs. Such divergence might reflect the various financial constraints faced by SOEs and non-SOEs.
When using market leverage, the coefficients of StockRet are negative and significant in all three models.
The effect of cumulative market return (MarRet) on book leverage is negative and highly significant for all
three models. These results indicate that Chinese firms tend to reduce leverage in periods of unfavorable
market conditions. However, MarRet exhibits insignificant coefficients in the regressions of market
leverage.
The coefficient of industry-median growth (Indgrow) is 0.173 and significant at the 1% level in the book
leverage regression of full sample with minor variables reintroduced. Compared with the coefficient of
0.039 reported for the U.S. firms (Frank and Goyal, 2009), the coefficient of industry-median growth in
Chinese firms is over four times larger. This dramatic difference might again reflect the difficulty of
acquiring equity financing for rapidly growing industries. This effect is stable within the subsamples of
SOEs and non-SOEs. The dummy for regulated firms (RegInd) exhibits a positive and significant coefficient
in the book-leverage regression of the overall sample. Moreover, the positive effect appears stronger in the
subsample of non-SOEs. The results support the argument that regulated firms have more debt, given their
more stable cash flows and lower expected costs of financial distress.
As shown in Table 7, macroeconomic variables significantly affect corporate leverage. GDP growth
(GDPgrow) exhibits a coefficient of 0.803 (highly significant at the 1% level) in the overall sample
regression of book leverage. Further subsample regressions show that the positive effect is more
pronounced for non-SOEs for both book leverage and market leverage. Growth in profit after tax of
industrial firms (Macrogrow) shows an effect similar to that of GDP growth. These results suggest that
Chinese firms, particularly non-SOEs, tend to increase leverage when macroeconomic conditions are
favorable. Expected inflation rate (inflation) exhibits negative and significant coefficients in all
regressions. The negative effect of inflation is opposite to the effect reported by Frank and Goyal (2009).
We also observe the inflation coefficient to be smaller for SOEs than for non-SOEs. Our results overall
suggest that SOEs are less sensitive to macroeconomic variables in leverage decisions, compared with
non-SOEs.
Finally, managerial shareholding (Topshare) exhibits negative and significant coefficients in the overall
sample regressions of book leverage only. Moreover, the regional marketization index (Marindex) is not
significantly associated with either leverage measure, suggesting that regional institutions are
inconsequential in the capital structure decisions of Chinese listed firms. These results contrast with
previous findings that Chinese firms (mostly non-listed) in effectively developed regions are associated
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 109

with reduced access to long-term debt (Li et al., 2009). However, such a discrepancy is understandable in
that listed firms can raise debt nationwide, and are thus less affected by regional institutions.

4.5. Further tests of the effects of state-control

To understand the mechanism behind the negative coefficients of the state-control dummy variable,
we conduct three additional tests. First, we test whether the state-control dummy affects the book
leverage of listed firms immediately after their IPOs and present the results in Panel A of Table 8. The SOE
dummy exhibits a coefficient of 0.003 with no sign of significance, suggesting that the lower leverage of
state-controlled listed firms is not caused by the initial stage leverage immediately following the IPO
process.
We subsequently test whether state-controlled firms have a greater increase in leverage when an
exogenous shock on supply of bank loans occurred in 2009. Facing a deteriorating economy caused by
the global financial crisis since 2008, the Chinese central government intended to boost the economy
with vast investment and proposed a stimulus plan amounting to 4 trillion Yuan in 2009. To fund these
investments, the Chinese government required domestic banks to dramatically increase the supply of
bank loans in 2009. Consequently, Chinese banks experienced an increase of 9.59 trillion Yuan in overall
bank-loan balance, whereas the increase was only 4.9 trillion Yuan in 2008. We run a regression of
book-leverage changes on the SOE dummy and changes of a set of control variables. We find that SOE
exhibits a positive but statistically insignificant coefficient, suggesting that state-controlled listed firms
did not experience a meaningful larger increase in book leverage increase even with an abundant loan
supply.
Finally, we estimate the effect of the SOE dummy on the likelihood of rights issue. We show that SOE
has a coefficient of 0.435 (significant at the 1% level), implying that, else being equal, state-controlled
listed firms are more likely to obtain approval for rights issuing. These additional tests support our
argument that the negative coefficient of the state-control dummy in the leverage regression captures
easier access to the seasoned equity market for state-controlled listed firms.

5. Robustness tests

In the previous process of selecting core factors, we measured leverage according to book value
and selected seven core factors of capital structure determinants. We now repeat the process of
selecting core factors, using market-value based leverage instead. As shown in Appendix Table 2,
the new process determines eight core factors, including industry-median leverage, asset size,
profitability, MB ratio, asset tangibility, general and administrative expenses, largest shareholding,
and asset growth. Most of our core factors in the book leverage model remain in the selection process
when using market leverage. The MB ratio and general and administrative expenses become
new core factors affecting market leverage. However, the significant effect of the MB ratio is likely
caused by its negative mechanical relation to market leverage, and the SOE dummy is no longer a core
factor.
In addition, we reestimate the core factor model according to year and ownership, using market
leverage as the dependent variable. Our non-tabulated estimates show that the patterns of core factors as
reported in Appendix Table 2 generally hold in various subsamples, highlighting the robustness of our
results.
In the previous analysis, we defined ownership based on the characteristic of the ultimate shareholder,
without considering the shares held by the controlling shareholder. In this section, we define a firm as an
SOE if its ultimate shareholder is the state and the ratio of shares held by the largest shareholder is
greater than 20%. We still find that SOEs tend to have significantly low leverage and the largest
shareholder's holdings are significantly associated with leverage only for SOEs.
Finally, we removed 709 observations from the sample of primary analysis because of missing
daily-return data necessary to calculate the firm-risk measure. We now drop the firm risk variable
and recover these observations. Our previous results still hold when using this larger sample.
110 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

6. Conclusion

China is the second largest world economy and continues to grow rapidly. Although the continually
expanding capital market in China is attracting increasing global investment, its distinct institutional
features often complicate the understanding of Chinese firms. Capital structure decision is one of the most
crucial corporate decisions. However, previous studies have often yielded contradictory results on the
reliable and important determinants of capital structure for Chinese firms.
We employ the BIC methodology to examine the relative importance of various capital structure
determinants of Chinese listed firms from 1998 to 2009. The selection process identifies seven reliable core
factors explaining book leverage: profitability, industry leverage, asset growth, tangibility of assets, firm
size, state-control dummy, and the largest shareholding.
Our evidence suggests that profitability is the most prominent factor, reflecting that the severe
financial constraints faced by Chinese listed firms make their internal capital accumulation far more
crucial compared with the U.S. firms. The relative importance of asset growth also reflects the financial
constraints of Chinese firms to access equity financing, so that rapidly growing firms have no choice but to
raise debt to finance their growth. Our estimates for these two variables provide a typical view of how
financial constraints affect corporate capital structure decisions in China.
In China, state influence is inevitable. We observe that the state-control dummy is negatively related to
book leverage and show that the negative effect can be derived from favorable treatment in seasoned
equity issuance. We report that the effects of numerous minor factors for SOEs differ from those for
non-SOEs, suggesting the various degrees of financial constraints for SOEs and non-SOEs. These findings
indicate that the characteristic of ownership is a factor that should be prioritized in understanding the
capital structure of Chinese listed firms.
We demonstrate how the unique institutional environment of the Chinese capital market shapes the
capital structure decisions of listed firms. We contribute to the literature by providing reliable and
important variables to control in future studies on capital structure decisions in China.

Appendix A

Appendix Table 1
Variable definitions.

Variable Definition

Financial leverage
LEV Book leverage, calculated as the sum of short-term loans, long-term debt due within one year and long-term debt
divided by the book value of total assets
MLEV Market leverage, calculated as the sum of short-term loans, long-term debt due within one year and long-term
debt divided by the sum of book value of liabilities and market value of equity

Firm size
LnAsset The natural log of book value of total assets at the end of year
Age The number of years between the current year and the listing year

Profitability
ROA Return on assets, calculated as operating income divided by total assets

Growth
MB Market-to-book ratio, calculated as the sum of book value of liabilities and market value of equity divided by book
value of total assets
Agrow Asset growth, calculated as the difference in the assets between current year and previous year divided by the
assets in previous year
Capex Capital expenditure, calculated as the change in fixed assets divided by total assets

Nature of assets
Tangas Tangibility of assets, calculated as fixed assets divided by total assets
Unique Industry uniqueness dummy, equal to one if a firm operates in the following industries: chemicals and allied
products, electronic, telecommunication and related equipment manufacturing, computer and related equipment
manufacturing, and zero otherwise
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 111

Appendix Table 1 (continued)

Variable Definition

GAexp General and administrative expenses, calculated as the industry median-adjusted ratio of the sum of
administrative expenses and operating expenses divided by total assets

Taxes
NDTS Non-debt tax shields, calculated as depreciation expenses divided by total assets
ETR Effective tax rate, calculated as income tax expenses divided by profit before tax. The value is required to be 0 or
1 if the raw value is less than 0 or greater than 1.

Risk
Stockstd Stock return volatility, calculated as the annual standard deviation of equity returns. The value is coded as missing
if the number of valid daily return observations in a year is less than 200.

Industry
Ind_LEV The median of LEV by industry and year
Ind_MLEV The median of MLEV by industry and year
Indgrow The median of Agrow by industry and year
RegInd Regulated industry dummy, equal to one if a firm operates in the following industries: mining, railroads, trucking,
airlines, telecommunications, gas and electric utilities, Culture and Media.

Stock market conditions

StockRet Cumulative annual raw stock returns.
MarRet Cumulative annual A-share market returns.

Macroeconomic conditions
Macrogrow Growth in after-tax-profit of industrial firms. The growth rate of overall profit for industrial firms above designated
size (5 million sales).
GDPgrow GDP growth, calculated as the difference in the GDP between current year and previous year divided by the GDP in
previous year, where comparable GDP is used.
Inflation Expected inflation rate, calculated as the difference in the consumer price index between current year and previous
year divided by the consumer price index in previous year.

Chinese institutions
Blockshare The ratio of shares held by the largest shareholder
Topshare The ratio of shares held by the top management
SOE A dummy variable equal to one if a firm is ultimately controlled by the state, and zero otherwise.
Marindex The marketization index of the province where the firm is located

Appendix Table 2
Core factor selection using market leverage for Chinese listed firms.

Coefficient t-Statistics Own R2 Cumulative R2 BIC Group Group Year Year

positive negative positive negative
(%) (%) (%) (%)

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

Ind_MLEV 0.865 32.626 0.236 0.236 −20,727.398 100 0 92 0

LnAsset 0.029 8.803 0.094 0.292 −21,724.631 100 0 100 0
ROA −0.548 −11.476 0.114 0.427 −24,474.485 0 100 0 100
MB −0.017 −8.285 0.195 0.455 −25,132.109 0 100 0 75
NDTS −0.001 −0.011 0.012 0.455 −25,122.629 10 60 0 33
Tangas 0.120 6.338 0.037 0.470 −25,471.065 100 0 75 0
GAexp −0.360 −5.134 0.000 0.478 −25,657.004 0 80 0 75
Blockshare −0.055 −4.164 0.008 0.483 −25,775.947 0 90 0 92
Agrow 0.031 3.346 0.001 0.487 −25,862.476 70 0 58 0
ETR 0.020 2.292 0.001 0.487 −25,869.335 30 0 25 0
SOE −0.009 −2.192 0.000 0.488 −25,885.635 0 30 0 25
StockRet −0.007 −1.426 0.064 0.490 −25,916.458 0 40 17 33
Inflation −0.294 −2.149 0.028 0.492 −25,960.530 0 20

(continued on next page)

112 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113

Appendix Table 2 (continued)

Coefficient t-Statistics Own R2 Cumulative R2 BIC Group Group Year Year
positive negative positive negative
(%) (%) (%) (%)

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

Topshare −0.050 −1.861 0.006 0.492 −25,963.353 0 10 0 17

Macrogrow 0.025 1.211 0.002 0.493 −25,982.222 10 0
Indgrow 0.051 1.178 0.012 0.494 −25,981.432 10 0 0 0
Marindex −0.001 −0.953 0.001 0.494 −25,976.970 0 20 0 0
RegInd 0.006 0.898 0.004 0.494 −25,971.751 0 0 0 0
GDPgrow 0.179 0.870 0.015 0.494 −25,968.962 20 0
MarRet −0.003 −0.529 0.020 0.494 −25,961.800 10 10
Stockstd 0.277 0.870 0.001 0.495 −25,956.613 10 0 33 0
Age 0.000 −0.479 0.023 0.495 −25,948.130 0 10 8 0
Unique 0.002 0.411 0.000 0.495 −25,939.301 0 0 0 0
Capex 0.000 −0.020 0.003 0.495 −25,929.821 0 10 8 0

This table reports the results of core factor selection using market leverage (MLEV). The definitions of all factors are provided in
Appendix Table 1. All continuous variables measured at firm level are winsorized at 1% and 99% levels. We start with a regression of
market leverage on all factors and report all statistics at the bottom of the table. Column (1) reports the coefficient estimate of the
factor with the lowest t-statistic. Column (2) reports the t-statistic of the worst-performing factor. Column (3) reports the own R2
from univariate regression of leverage on this factor. Column (4) reports the cumulative R2 of the regression that include the listed
variable and all variables listed above it. Column (5) reports the Bayesian Information Criterion. The standard errors are adjusted for
clustering at both the firm level and the year level. We then remove this worst-performing factor and regress leverage against the
remaining variables. The corresponding statistics of this regression are reported in the second to the bottom row. We continue in this
manner up the table. The percentage of cases that a certain factor has a positive coefficient and is included in the minimum BIC
specification in 10 equal-sized random sub-samples is reported in Column (6). The percentage of cases that a certain factor has a
negative coefficient and is included in the minimum BIC specification in 10 equal-sized random sub-samples is reported in Column
(7). The percentage of cases that a certain factor has a positive coefficient and is included in the minimum BIC specification in twelve
annual sub-samples is reported in Column (8). The percentage of cases that a certain factor has a negative coefficient and is included
in the minimum BIC specification in twelve annual sub-samples is reported in Column (9).

References

Adam, T.R., Goyal, V.K., 2008. The investment opportunity set and its proxy variables. J. Financ. Res. 31, 41–63.
Allen, F., Qian, J., Qian, M., 2005. Law, finance and economic growth in China. J. Financ. Econ. 77, 57–116.
Bhabra, H.S., Liu, T., Tirtiroglu, D., 2008. Capital structure choice in a nascent market: evidence from listed firms in China. Financ.
Manag. 37, 341–364.
Booth, L., Aivazian, V., Demirguc-Kunt, A., Maksimovic, V., 2001. Capital structures in developing countries. J. Financ. 56, 87–130.
Brandt, L., Li, H., 2003. Bank discrimination in transition economies: ideology, information, or incentives? J. Comp. Econ. 31, 387–413.
Cai, K., Fairchild, R., Guney, Y., 2008. Debt maturity structure of Chinese companies. Pac. Basin Financ. J. 16, 268–297.
Chan, K., Wang, J., Wei, K.C.J., 2004. Underpricing and long-term performance of IPOs in China. J. Corp. Financ. 10, 409–430.
Chen, J.J., 2004. Determinants of capital structure of Chinese listed companies. J. Bus. Res. 57, 1341–1351.
Cull, R., Xu, L.C., Zhu, T., 2009. Formal finance and trade credit during China's transition. J. Financ. Intermed. 18, 173–192.
Demirguc-Kunt, A., Maksimovic, V., 1999. Institutions, financial markets and firm debt maturity. J. Financ. Econ. 54, 295–336.
Dewenter, K.L., Malatesta, P.H., 2001. State-owned and privately owned firms: an empirical analysis of profitability, leverage, and
labor intensity. Am. Econ. Rev. 91, 320–334.
Fan, J.P.H., Huang, J., Zhu, N., 2009. Distress without bankruptcy: an emerging market perspective. Working Paper. Chinese University
of Hong Kong.
Fan, J.P.H., Titman, S., Twite, G.J., 2012. An international comparison of capital structure and debt maturity choices. J. Financ. Quant.
Anal. 47, 23–56.
Fan, G., Wang, X., Zhu, H., 2010. NERI Index of Marketization of China's Provinces 2009 Report. The Economic Science Press (in
Chinese), Beijing.
Firth, M., Lin, C., Wong, S.M.L., 2008. Leverage and investment under a state-control bank lending environment: evidence from China.
J. Corp. Financ. 14, 642–653.
Frank, M.Z., Goyal, V.K., 2009. Capital structure decisions: which factors are reliably important? Financ. Manag. 38, 1–37.
Gungoraydinoglu, A., Öztekin, Ö., 2011. Firm-and country-level determinants of corporate leverage: some new international
evidence. J. Corp. Financ. 17 (5), 1457–1474.
Harris, M., Raviv, A., 1991. The theory of capital structure. J. Financ. 46, 297–356.
Hastie, T., Tibshirani, R., Friedman, J., 2001. The Elements of Statistical Learning: Data Mining, Inference, and Prediction. Springer-
Verlag, New York.
Huang, G., Song, F.M., 2006. The determinants of capital structure: evidence from China. China Econ. Rev. 17, 14–36.
Kim, Y., Ho, I.S.M., Giles, M.S., 2003. Developing institutional investors in People's Republic of China. The World Bank Country Study
Paper.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 1999. Corporate ownership around the world. J. Financ. 54, 471–517.
Li, K., Yue, H., Zhao, L., 2009. Ownership, institutions, and capital structure: evidence from China. J. Comp. Econ. 37, 471–490.
 C. Chang et al. / Pacific-Basin Finance Journal 30 (2014) 87–113 113

Myers, S.C., 1984. The capital structure puzzle. J. Financ. 39, 575–592.
Myers, S.C., Majluf, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not
have. J. Financ. Econ. 13, 187–221.
Öztekin, Ö., 2014. Capital structure decisions around the world: which factors are reliably important? J. Financ. Quant. Anal.
(forthcoming).
Petersen, M., 2009. Estimating standard errors in finance panel data sets: comparing approaches. Rev. Financ. Stud. 22, 435–480.
Qian, Y., Tian, Y., Wirjanto, T.S., 2009. Do Chinese publicly listed companies adjust their capital structure toward a target level? China
Econ. Rev. 20, 662–676.
Rajan, G.R., Zingales, L., 1995. What do we know about capital structure? Some evidence from international data. J. Financ. 50,
1421–1460.
Schwarz, Gideon E., 1978. Estimating the dimension of a model. Ann. Stat. 6 (2), 461–464.
Strebulaev, I.A., 2007. Do tests of capital structure theory mean what they say? J. Financ. 62, 1747–1787.
Stulz, R.M., 1990. Managerial discretion and optimal financing policies. J. Financ. Econ. 26, 3–27.
Sun, Q., Tong, W.H.S., 2003. China share issue privatization: the extent of its success. J. Financ. Econ. 70, 183–222.
Tong, G., Green, C.J., 2005. Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies. Appl. Econ.
37, 2179–2189.
Wald, J.K., 1999. How firm characteristics affect capital structure: an international comparison. J. Financ. Res. 22, 161–188.
Zou, H., Xiao, J.Z., 2006. The financing behaviour of listed Chinese firms. Br. Account. Rev. 38, 239–258.