State-owned capital participation and deleveraging of over-indebted private-owned enterprises: Evidence from China

Using the reverse mixed-ownership reform (RMOR) of private-owned enterprises (POEs) as context, this paper examines the impact of state-owned capital participation on the deleveraging of over-indebted POEs in China. Results show that such participation can promote the deleveraging of over-indebted enterprises. Mechanism analysis reveals that state-owned capital helps restrain tunneling by major shareholders, thus reducing the excessive leverage motivated by such behavior. By contrast, little support is found for the channel through which state-owned capital facilitates deleveraging by improving operational performance. The results of heterogeneity tests show that the positive effect of state-owned capital participation on deleveraging is significant among firms in regions with higher government debt and stronger legal environments and more pronounced in companies with higher levels of managerial overconfidence. Implementation of the deleveraging policy can also weaken the effect of such capital participation on the deleveraging of POEs. The deleveraging effect of state-owned capital is primarily manifested in the reduction of short-term debt, an effect that persists over time. Finally, the positive effect of state-owned capital participation on the deleveraging of over-indebted enterprises helps improve corporate value and reduce operational risks. Our findings can deepen understanding of the relationship between equity structure and capital structure from the RMOR perspective.