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Corporate deleveraging and financial flexibility: A Chinese case-study

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  • Lai, Karen
  • Prasad, Ashna
  • Wong, George
  • Yusoff, Iliyas

Abstract

Using a firm-by-firm longitudinal approach, we find that highly levered firms in the United States and China systematically deleverage to restore financial flexibility over a median six-year period. In the Chinese context, the deleveraging period from the market leverage peak to trough is five years for non-state owned enterprises (non-SOEs) and developing firms, and seven years for SOEs and mature firms. Non-SOEs and developing firms are less capable of restoring financial flexibility than their SOE and mature firm counterparts. Debt repayment is the main contributor to the deleveraging process for both Chinese and US firms. Share issuance contributes more than the retained earnings in the deleveraging process for Chinese firms.

Suggested Citation

  • Lai, Karen & Prasad, Ashna & Wong, George & Yusoff, Iliyas, 2020. "Corporate deleveraging and financial flexibility: A Chinese case-study," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:pacfin:v:61:y:2020:i:c:s0927538x19305712
    DOI: 10.1016/j.pacfin.2020.101299
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    Cited by:

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    2. Xiaocui Deng & Xiaojian Su, 2023. "Do Financial Liabilities Matter in “Size Effect”? Evidence from the Chinese A-Share Market," Sustainability, MDPI, vol. 15(4), pages 1-11, February.
    3. Ma, Huanyu & Hao, Dapeng, 2022. "Economic policy uncertainty, financial development, and financial constraints: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 368-386.
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    5. Fu, Kangkang & Kwok, Wing Chun & Wong, George, 2020. "Agency, firm growth, and managerial turnover: A Chinese study," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Corporate deleveraging; Financial flexibility; Life cycle; State-owned enterprises;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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