Macro leverage ratio of government departments and the dynamic adjustment of corporate capital structure

Previous theoretical and empirical research has suggested that the government's expansion of economic activities, such as financing and investment, can lead to a lower level of corporate capital structure. Thus, this study is to examine the impact of the government's macro leverage on the dynamic adjustment of corporate capital structure (both short- and long-term) in the context of China. Using a compound one-step regression equation in a capital structure dynamic adjustment model, we found that the macro leverage ratio of Chinese government departments increases the dynamic adjustment speed of corporate capital structure, with a stronger influence on over-indebted firms compared to under-indebted firms. Specifically, when the macro leverage ratio of Chinese government departments increases, the over-indebted firms adjust at a faster rate toward their target long-term capital structure than the under-indebted firms. Conversely, the under-indebted firms adjust at a faster rate toward their target short-term capital structure than the over-indebted firms. These results are robust to alternative measures of capital structure and to endogeneity concerns.