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Capital Structures in an Emerging Market: A Duration Analysis of the Time Interval Between IPO and SEO in China

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Abstract

We model the durations between firms’ “Initial Public Offerings” (IPOs) and their subsequent “Seasoned Equity Offerings” (SEOs) in China during the period from 1 January 2001 to 1 July 2006. Duration analysis is applied by using the nonparametric Kaplan-Meier estimator of the hazard function, and parametric accelerated failure time models with time-varying covariates. The results of this analysis have important implications for the capital structure in emerging markets. Our evidence on financing decisions in China contradicts the predictions of both the trade-off theory and the pecking order theory. Firms do not issue equity after debt financing to offset the deviation from the target leverage ratio. Profitability is negatively related to debt ratios. Limited access to the corporate bond market and the privilege of the low effective tax rate that local governments give to firms have increased the cost of debt and decreased the benefit of debt, and make firms in China under-utilize the tax shield of debt. The most surprising finding is that profitability is positively related to the conditional probability of equity financing. Firms may intentionally manipulate the earnings to minimize the adverse section costs associated with equity financing and to meet the earnings requirement of China Securities Regulatory Commission set for SEO qualifications. Market timing is an important consideration when firms in China undertake equity financing.

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  • Yang Ni & Shasha Guo & David E. Giles, 2009. "Capital Structures in an Emerging Market: A Duration Analysis of the Time Interval Between IPO and SEO in China," Econometrics Working Papers 0905, Department of Economics, University of Victoria.
    • Handle: RePEc:vic:vicewp:0905
    Note: ISSN 1485-6441
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    Cited by:

    1. Fonseka, M.M. & Samarakoon, Lalith P. & Tian, Gao-Liang, 2012. "Equity financing capacity and stock returns: Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1277-1291.
    2. Zavertiaeva, Marina & Nechaeva, Iuliia, 2017. "Impact of Market Timing on the Capital Structure of Russian Companies," Journal of Economics and Business, Elsevier, vol. 92(C), pages 10-28.

    More about this item

    Keywords

    Duration analysis; conditional hazard probability; capital structure; initial public offering; seasoned equity offering; China;

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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