Vertical cross-shareholding and dynamic capital structure adjustment

As a new governance mechanism, vertical cross-shareholding (VCS) can promote information sharing and coordination between upstream and downstream firms in the supply chain. In this study, we investigate the impact of VCS on the dynamic adjustment of corporate capital structure. Based on the data of Chinese A-share listed firms from 2010 to 2022, we find that VCS can accelerate the adjustment of corporate capital structure, especially for under-leveraged firms, while the effect of VCS on the adjustment of capital structure is relatively weak for over-leveraged firms. The mechanism analysis shows that VCS can accelerate the adjustment of corporate capital structure through the following three channels: supply chain information sharing, optimization of corporate governance structure and synergic utilization of financial resources. Moreover, the effect of VCS is stronger in state-owned enterprises, in regions with stronger regulatory environment and for firms with higher relational embeddedness. An additional analysis shows that VCS can help reduce the deviation of target capital structure for firms with extreme leverage ratio, either too high or too low, which also shows that VCS has a corrective effect on the capital structure. This study provides evidence for the strategic significance of VCS in improving the flexibility of corporate capital structure and reducing financial risks in emerging markets.