The relationship between product market competition and capital structure in Chinese listed firms

Y. Guney, Ling Li, Richard Fairchild

Research output: Contribution to journalArticle

38 Citations (Scopus)

Abstract

Financial and industrial economists have increasingly recognized the interaction between product market competition and financing decisions of firms. This paper analyzes the relationship between product market competition (measured by Tobin's Q) and the capital structure of Chinese listed firms in a static and dynamic setting. We study an unbalanced panel dataset of 10,416 firm-year observations in 12 industries from 1994 to 2006. Employing several empirical methods, this study finds that there are significant differences in the debt ratios and product market competition across different industries. Our results suggest that the relationship between leverage and product market competition is non-linear (parabolic or cubic), depending on industry type, company size and firms' growth opportunities. The system-GMM results reveal that Chinese firms tend to adjust their leverage ratios through time. Overall, the fixed effects and GMM estimates detect a linear and inverse relationship between the intensity of competition and leverage ratio, which supports the predation theory.
Original languageEnglish
Pages (from-to)41-51
Number of pages11
JournalInternational Review of Financial Analysis
Volume20
Issue number1
Early online date10 Nov 2010
DOIs
Publication statusPublished - Jan 2011
Externally publishedYes

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