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Debt capacity, debt choice, and underinvestment problem: Evidence from China

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  • Kalim-Ullah Bhat
  • Shihua Chen
  • Yan Chen
  • Khalil Jebran

Abstract

This study investigates how short-term debt and debt capacity help firms to make efficient financing decisions and reduce underinvestment problem. The sample includes Chinese nonfinancial firms listed on the Shanghai and Shenzhen Stock Exchanges over the period 2007 to 2017. The findings indicate that short-term debt is positively related to leverage. The results also indicate that growth positively influences leverage. The results further show that short-term debt enhances the positive impact of growth on leverage. These findings reveal that short-term debt makes firms financially flexible, and allows them to obtain more cost-effective debt by repricing and renegotiation of debt contracts in the presence of valuable growth opportunities. Furthermore, the results illustrate that debt capacity is positively associated with leverage, suggesting that debt capacity helps firms to have an easy access to the credit market and reduce liquidity risk. Overall, the findings remain consistent across different types of firms (state-owned [S.O.E.] and non-state-owned enterprises [N.S.O.E.]) and by considering alternative proxy of growth.

Suggested Citation

  • Kalim-Ullah Bhat & Shihua Chen & Yan Chen & Khalil Jebran, 2020. "Debt capacity, debt choice, and underinvestment problem: Evidence from China," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 33(1), pages 267-287, January.
    • Handle: RePEc:taf:reroxx:v:33:y:2020:i:1:p:267-287
    DOI: 10.1080/1331677X.2019.1699438
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    Cited by:

    1. Yuanyue Wang & Zhaohui Yu & Xiaojing Yi, 2022. "Financing liabilities and inefficient investment of listed companies: Based on the adjustment effect of different financial structures," Australian Economic Papers, Wiley Blackwell, vol. 61(4), pages 848-875, December.

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