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The relationship between product market competition and capital structure in Chinese listed firms

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  • Guney, Yilmaz
  • Li, Ling
  • Fairchild, Richard

Abstract

Financial and industrial economists have increasingly recognized the interaction between product market competition and financing decisions of firms. This paper analyzes the relationship between product market competition (measured by Tobin's Q) and the capital structure of Chinese listed firms in a static and dynamic setting. We study an unbalanced panel dataset of 10,416 firm-year observations in 12 industries from 1994 to 2006. Employing several empirical methods, this study finds that there are significant differences in the debt ratios and product market competition across different industries. Our results suggest that the relationship between leverage and product market competition is non-linear (parabolic or cubic), depending on industry type, company size and firms' growth opportunities. The system-GMM results reveal that Chinese firms tend to adjust their leverage ratios through time. Overall, the fixed effects and GMM estimates detect a linear and inverse relationship between the intensity of competition and leverage ratio, which supports the predation theory.

Suggested Citation

  • Guney, Yilmaz & Li, Ling & Fairchild, Richard, 2011. "The relationship between product market competition and capital structure in Chinese listed firms," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 41-51, January.
  • Handle: RePEc:eee:finana:v:20:y:2011:i:1:p:41-51
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    Cited by:

    1. Li, Tongxia & Munir, Qaiser & Abd Karim, Mohd Rahimie, 2017. "Nonlinear relationship between CEO power and capital structure: Evidence from China's listed SMEs," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 1-21.
    2. Safdar Husain Tahir & Muhammad Adnan Naeem & Hazoor Muhammad Sabir & Khuram Shehzad Aslam, 2016. "Capital structure and its major determinants: evidence from banking sector of Pakistan," African Journal of Economic and Sustainable Development, Inderscience Enterprises Ltd, vol. 5(2), pages 137-148.
    3. Magali Pedro Costa & Cesaltina Pires, 2014. "Capital Structure, Product Market Competition and Default Risk," CEFAGE-UE Working Papers 2014_14, University of Evora, CEFAGE-UE (Portugal).
    4. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. repec:eee:reveco:v:51:y:2017:i:c:p:107-120 is not listed on IDEAS
    6. Liu, Jia & Lister, Roger & Pang, Dong, 2013. "Corporate evolution following initial public offerings in China: A life-course approach," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 1-20.
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    8. Sarkar, Sudipto, 2014. "Product–market flexibility and capital structure," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 111-122.
    9. Wei Huang & Agyenim Boateng & Alexander Newman, 2016. "Capital structure of Chinese listed SMEs: an agency theory perspective," Small Business Economics, Springer, vol. 47(2), pages 535-550, August.
    10. Kordanuli, Bojana & Barjaktarović, Lidija & Jeremić, Ljiljana & Alizamir, Meysam, 2017. "Appraisal of artificial neural network for forecasting of economic parameters," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 465(C), pages 515-519.
    11. Mukhoti, Sujay & Guhathakurta, Kousik, 2015. "Product market performance and capital structure: A Hierarchical Bayesian semi-parametric panel regression model," MPRA Paper 62517, University Library of Munich, Germany.
    12. Voutsinas, Konstantinos & Werner, Richard A., 2011. "Credit supply and corporate capital structure: Evidence from Japan," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 320-334.

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