Credit expansion, state ownership and capital structure of Chinese real estate companies

Abstract

Purpose – The purpose of this paper is to explore the impact of the credit expansion in 2009 and 2010 in China on the capital structure of listed real estate companies. Design/methodology/approach – Chinese listed real estate companies are divided into two groups, state-owned and non-state-owned, because their access to credit markets have different priority to state-owned banks that dominate bank lending. The difference-in-differences approach is employed to test the impact of changes in leverage ratios and loan ratios before and after the credit expansion period in state-owned firms and non-state-owned firms. Findings – Using quarterly panel regressions, the authors find that during the credit expansion period, state-owned companies exhibit a relatively greater increase in leverage ratios than non-state-owned firms. State-owned firms have greater increases in book leverage ratios, market leverage ratios and long-term debt ratios by 5.2, 4.9 and 1.1 per cent, respectively. It is also shown that loan ratios have increased more in state-owned firms than non-state-owned firms during the credit expansion period. Research limitations/implications – The paper explores only the impacts of credit expansion on capital structure of listed real estate firms in China. Further studies can be conducted to investigate the impact of credit supply on corporate investment decisions of real estate firms and on real estate markets. Practical implications – The findings can help explain the surge in land and housing prices after 2008 in China. Deng et al. (2015) find that state-owned real estate firms paid more for land price than non-state-owned firms, which contributed to upward pressure on housing prices. This paper shows that such “over-investment” may be due to the increase of debt financing and availability of bank loans to real estate firms. Thus the credit market can affect real estate markets through debt financing at company level. Originality/value – This paper is the first to investigate the impact of credit supply on capital structure of real estate companies, and presents evidence of the importance of credit supply as a determinant of capital structure.