Financial crises and Adjustment rate of firms towards target capital structure: Evidence from China

Abstract

This paper examines the impact of the global financial crisis of 2007-08 on 897 Chinese listed non-financial firms by examining changes in their adjustment rate towards target capital structure from 2003 to 2012. Dynamic panel data technique has been used and it is found that there is noticeable change on both firm level and macroeconomic level determinants of target capital structure before and after the financial crisis. The study observes increased adjustment rate towards target capital structure after the financial crises. During pre-financial crises period Chinese non-financial firms adjust toward their leverage targets at an annual adjustment rate of 15-53% and fully reach their leverage targets within 2-7 years. While during post-financial crises period Chinese non-financial firms adjust toward their leverage targets at an annual adjustment rate of 24-60% and fully reach their leverage targets within 1.7-4.1 years.

Keywords – Target capital structure, adjustment rate, dynamic panel data models, China.