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Capital Structures in an Emerging Market: A Duration Analysis of the Time Interval Between IPO and SEO in China

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Author Info
Yang Ni () (Queen's School of Business, Queen's University)
Shasha Guo (BP Canada)
David E. Giles () (Department of Economics, University of Victoria)

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Abstract

We model the durations between firms’ “Initial Public Offerings” (IPOs) and their subsequent “Seasoned Equity Offerings” (SEOs) in China during the period from 1 January 2001 to 1 July 2006. Duration analysis is applied by using the nonparametric Kaplan-Meier estimator of the hazard function, and parametric accelerated failure time models with time-varying covariates. The results of this analysis have important implications for the capital structure in emerging markets. Our evidence on financing decisions in China contradicts the predictions of both the trade-off theory and the pecking order theory. Firms do not issue equity after debt financing to offset the deviation from the target leverage ratio. Profitability is negatively related to debt ratios. Limited access to the corporate bond market and the privilege of the low effective tax rate that local governments give to firms have increased the cost of debt and decreased the benefit of debt, and make firms in China under-utilize the tax shield of debt. The most surprising finding is that profitability is positively related to the conditional probability of equity financing. Firms may intentionally manipulate the earnings to minimize the adverse section costs associated with equity financing and to meet the earnings requirement of China Securities Regulatory Commission set for SEO qualifications. Market timing is an important consideration when firms in China undertake equity financing.

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Publisher Info
Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 0905.

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Length: 32 pages
Date of creation: 19 Jun 2009
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Handle: RePEc:vic:vicewp:0905

Note: ISSN 1485-6441
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Web page: http://web.uvic.ca/econ
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Related research
Keywords: Duration analysis; conditional hazard probability; capital structure; initial public offering; seasoned equity offering; China;

Find related papers by JEL classification:
C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Econometric and Statistical Methods; Specific Distributions
C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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References listed on IDEAS
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