Research On The Impact Of Real Estate Diversification Strategy On Corporate Financing Behavior And Business Performance

Since Chinese economy has entered the new normal period,how to implete corporate deleveraging correctly and effectively,and how to prevent China’s economic “breaking away from reality” carefully,these two topics have been concerned by the academic community,policy makers,and all sectors of society.As the corporate real estate diversification represents Chinese housing boom stimulates firms to invest their limited resources in real estate industry,this is a special form of China’s economic “breaking away from reality”.From the perspective of “corporate real estate diversification strategy”,this research investigates the economic consequences of China’s economic “breaking away from reality” at the firm level,including the impact of corporate real estate diversification strategy on corporate financing behavior and business performance.As firms which diversified into the real estate industry have more real estate as collateral,this will reduce information asymmetry between companies and creditors,and enhance the company’s liquidation value,thus creditors will be more willing to borrow debt to firms entered the real estate industry.Moreover,different types of creditors faces different degrees of information asymmetry with firms,and the impact of the increase in collateral value on the liquidation value of creditors is not the same.Therefore,the real estate diversification strategy will inevitably affect company’s capital structure and debt structure.In addition,firms diversify into the real estate industry out of the pursuit of high profits in the housing market,while the housing market in China has a certain degree of particularity.Since the real estate industry mainly relies on the core resource "land",and Chinese land is in the hands of local governments,it is necessary to explore whether the real estate diversification strategy can really help companies to obtain high profits in the real estate market,thus helping firms realize the increase in operating performance? In summary,this article has important policy implications for China to remove the high leverage ratio related to real estate rationally,properly grasp the high leverage sources related to real estate,and the formulation of corporate development strategies and national industrial policies.There have been few studies referring to the economic consequences of corporate real estate diversification strategies.Domestic researches mainly care about the effect of Chinese housing boom on corporate real estate diversification strategy,and the negative effect of corporate real estate diversification strategies on the company’s long-term innovation behavior.However,there is no literature talking about how the corporate real estate diversification will affect corporate other operating behaviors,and what is the underlying mechanism? Besides,due to this is a unique phenomenon in China’s economic development process,and it is extremely rare in other countries(such as the United States and the United Kingdom).The foreign literature has not yet addressed the impact of corporate real estate diversification strategies on the company’s development.Based on the two important practical background in China,which includes “listed companies’ leverage ratio are always at the high level”,and China’s economic shows a clear trend of breaking away from reality”,this paper investigates the economic consequences of corporate real estate diversification from the perspectives of corporate financing behavior and company operating performance.By using the data of Chinese listed companies during the period 2000-2014,this article examines the effect of corporate real estate diversification on corporate development and its underlying mechanism from the aspects of corporate financing behavior and company operating performance.The article is divided into six chapters.The main contents of each chapter are as follows:The first chapter mainly introduces the research background,research questions,the significance of this research,the main content of the research,the corresponding logical framework,and the main innovations and contributions.The second chapter is the literature review.This chapter mainly introduces and reviews the literature related to this article from the four aspects: the theoretical and empirical literature on the impact of rising housing prices on the economy,research on corporate capital structure,research on corporate debt structure,and the impact of corporate diversification on corporate performance.The third chapter examines the impact of real estate diversification strategy on corporate capital structure.As one of the five core tasks of China’s supply-side reform,corporate deleveraging is of great significance in preventing China’s debt risk and promoting long-term economic growth.This study provides a new perspective on understanding the relationship between the Chinese real estate boom and the corporate capital structure.Studies generally document that housing boom can affect firms’ capital structure through the collateral channels.However,there are different conclusions about the existence of collateral effects in China.Other than the existing literature,this paper firstly proposes a “new” and important factor that influences Chinese capital structure,real estate diversification.This article confirms that corporate real estate diversification will drive up the corporate leverage ratio.This study found that corporate real estate diversification will lead to an increase of 3.4 percentage points in the debt ratio.In order to minimize the endogenous problems between real estate diversification and corporate leverage ratio,this paper adopts propensity score matching method and instrumental variable method to test the endogeneity of the model.Furthermore,this article explores the underlying mechanism through which corporate real estate diversification will affect corporate leverage ratio.The results show that the impact of real estate diversification on corporate debt ratios mainly comes from the reduction of corporate financing constraints.At the same time,the heterogeneity analysis in this paper shows that corporate real estate diversification is more pronounced in Non-SOEs.Also,this effect has no significant difference between firms at sectors with different growth rate of housing prices,while the growth rate of housing prices will change the maturity structure of corporate debt.Besides,corporate real estate diversification will reduce firms’ marginal borrowing costs,and this result is consistent with the conclusions of Cvijanovi?(2014).Therefore,this article confirms that Chinese housing boom will influence the financial resources allocation in enterprises through the resources redistribution effect,and this provides an important perspective for further understanding the financial risks arising from the high leverage ratio of Chinese listed companies.The fourth chapter adopts the panel threshold regression model proposed by Hansen(1999)to further examine the nonlinear relationship between corporate real estate diversification and corporate debt structure.Rauh and Sufi(2010)pointed out that we should not ignore the heterogeneity of corporate debt resources when studying the corporate leverage ratio,Therefore,identifying the debt source for highly leveraged companies is critical to the effectiveness of deleveraging policy implementation.This study finds that the real estate diversification strategy brought by the real estate boom will have a nonlinear effect on the corporate debt structure.That is,when companies face low risks,they rely on bank loan for debt financing when diversifying to the real estate industry;however,when companies face high risks,they will increase the trade credit ratio and reduce the bank loan ratio when diversifying to the real estate industry.This result confirms the conclusions of Ayyagari,Demirgü(?)-Kunt and Maksimovic(2010)that bank loans and trade credits have different service markets,and the high-risk companies will rely more on trade credit.After that,this paper explores the channels through which corporate real estate diversification strategies affect corporate debt structure.The study found that the effect of corporate real estate diversification on corporate debt structure is more pronounced in companies with strong financing constraints and in developed regions.This result verifies that the corporate real estate diversification strategy will affect firms’ bank loan ratio and trade credit ratio through the information asymmetry channels and the liquidation value channels.Furthermore,the heterogeneity analysis show that Non-SOEs’ real estate diversification has no significant effect on corporate bank loan ratio,but it will significantly increase firms’ trade credit ratio.Therefore,this paper provides a theoretical basis for rationally and effectively removing the listed firms’ high leverage ratio which related to Chinese housing boom.This paper also has a strong policy implication.Existing policies mostly aim towards removing corporate bank debt.By using the threshold regression model,this article found that compared to bank loan,trade credits related to Chinese housing boom face higher default risk.Therefore,government should pay more attention to the high risk of commercial credit.The fifth chapter further explores whether the corporate real estate diversification strategy can really help companies to grab the high profits of the real estate market,thereby help firms to increase its operating performance.Many studies document that corporate real estate diversification has the negative effect on corporate innovation and the long-time development.This study found that even in the short term,the corporate real estate diversification cannot achieve an increase in operating performance.In order to minimize the endogenous problems between real estate diversification and corporate leverage ratio,this paper adopts propensity score matching method and instrumental variable method to test the endogeneity of the model.Moreover,the channel analysis shows that the negative effect of corporate real estate diversification on its business performance is more pronounced in firms without politically connection and firms which are less relevant to the real estate industry.Meanwhile,this article examines the heterogeneity impact of corporate real estate diversification on corporate operating performance.The study finds that the negative effects of diversification of corporate real estate on company performance are more pronounced in less developed areas and in small-scale enterprises.The policy implications of this study are that the corporate real estate diversification is a special form of corporate diversification,it is thus an important manifestation of Chinese companies chasing the high profits of the real estate market and grabing the new development opportunities in the new markets.Therefore,this article has important implications for us to understand the economic consequences of corporate diversification strategy which aimed to seek a new profit growth point.The last chapter summarizes the full content,and proposes corresponding policy recommendations.Also,it points out the deficiencies of this paper and the direction of future research.The contributions and innovations of this paper are mainly reflected in three aspects: research perspectives,research data,and research methods.Specifically elaborated as follows:First of all,the most important innovation in this article comes from the innovation of research perspective.On the one hand,this article expanded the relevant literature on housing boom and corporate financing behavior.The existing literature mainly discusses the impact of house boom on the company’s capital structure and debt structure from the “collateral channels”.However,this article examines the influence of the corporate real estate diversification strategy on their financing behavior,which is the unique phenomenon driven by Chinese real estate boom.Due to the corporate real estate diversification is the resources redistribution effect brought by Chinese housing boom.It indicates housing boom stimulates firms to invest limited resources in real estate industries that do not have technology spillover effects.Therefore,this will have more serious negative consequences for the long-term development of the economy.This paper confirms that the real estate diversification strategy of Chinese companies is an important factor influencing corporate leverage ratio and debt ratio.On the other hand,this paper enriches the research on the influence of corporate real estate diversification on the corporate operating performance.The existing literature focuses on the effects of corporate real estate diversification on the corporate long-term behavior,especially the negative effect on firms’ innovation behavior.However,the research on the impact of corporate real estate diversification on their operating performance is relatively scarcity.This research shows that corporate real estate diversification strategy also cannot bring an increase in firms’ operating performance.Moreover,because the corporate real estate diversification strategy is an important manifestation of Chinese economy’s “breaking away from reality”phenomenon,this article also has an important enlightening effect on understanding the short-term economic consequences of this phenomenon.Besides,this article also enriches the literature on the corruption problems of Chinese land market.Studies generally document this problem from the land supply perspective,they found that local governments will be more inclined to sell land by the“two-stage” auctions,and land was sold at the lower prices.This is an important evidence of the existence of rent-seeking behavior in the Chinese land market.This paper provides a “new” evidence by proving that even though Chinese real estate market is thought as high profitable industries,corporate real estate diversification reduce their profit,and this negative effect only exists in firms without political connections.Secondly,our data also has certain innovation.Referring to Rong and Wang(2014)’s definition,this paper manually collected and expanded the key variable“firms’ real estate diversification” in time and space dimension.On the one hand,this article expands our data to Chinese listed companies across the country.Due to the availability of data,few literatures have investigated the influence of the corporate real estate diversification strategy at the firm level.Moreover,when comes to this problem,the existing literature always limit their sample to the listed companies in 35 large and medium-sized cities(Rong and Wang,2014;and Rong Wang and Gong,2016).However,due to the fact that 35 large and medium-sized cities are relative developed comparing to other regions,and Chinese real estate market is locally segmented.Therefore,their data has difficulty to represent the national situation.On the other hand,this article extends our sample period to2000-2014,which can help us to further understand the impact of corporate real estate diversification strategy in different economic cycles.Meanwhile,since it is very common for Chinese listed companies hold "investment property"(Touzixing Fangdichan),however,this data was published after 2007,thus this article extends the data to 2014 can help us control the effect of the "investment property" in the robustness test,which can improve the credibility of our paper.Finally,this article also extends the research on the factors that influence corporate debt structure through the use of relatively new research methods.Through using the threshold regression model proposed by Hansen(1999),this paper finds that when the business risk is low,corporate real estate diversification mainly relies on bank loans;but when the business risk is high,corporate real estate diversification will increase the corporate trade credit ratio,and reduce the proportion of bank loan.This provides a new empirical evidence for our understanding of the issue of "the impact of trade credit on the corporate development of Chinese listed companies." The findings of this paper aslo support the views of Ayyagari,Demirgü(?)-Kunt,and Maksimovic(2010): trade credit and bank loan have different service markets,and trade credit can hardly substitute for formal finance dominated by bank loans.At the same time,this also provides us some new ideas for China to remove corporate debt risk which related to Chinese housing market.