The Evolution Of Capital Structures: Evidence From China's Listed Companies

This paper considers the empirical regularities of capital structure determinants and dynamic characteristics.Firstly, we analyze the determinants of leverage ratios. The empirical evidence shows that the leverage is positively related to firm size, tangibility, dividend, as well as industry-level leverage, which is the most important, and negatively related to profitability and market-to-book ratio. These regularities are consistent with the predictions of trade-off theory in capital structure decisions.Secondly, we consider the evolution of capital structure. We find that there exist large cross-sectional heterogeneity in capital structure, and leverage ratios are relatively stable over time. In addition, there exists noticeable convergence among leverage ratios over time. These dynamic features of leverage are largely unexplained by existing determinants. Each firm is adjusting toward moving target leverage, which is consistent with the dynamic trade-off theory of capital structure.