Real estate industry has become one of the pillar industries in China in recent decades. While it is classified as a capital intensive industry, most of the capital comes from debt due to the imperfect financial market in China. Since debt consists a part proportion of a firm’s liabilities, in-depth understanding regarding the debt maturity structure helps promote the business and sustainability of real estate industry, specially in current economic environment with global financial crisis and corporate income tax reform. This research will provide an empirical research regarding Chinese listed real estate companies. The study designs ta model with unbalanced panel data, which consist 110 listed real estate companies with 840 observations during the period of 2005 to 2012. The findings passed Hausman test and a pooled OLS model and a fixed effects model are employed in this study. Results of this study shows that the company size, liquidity, leverage, and assets maturities are positively related to the debt maturity structure, while growth rate is negatively related to the debt maturity structure. It contributes to the study of factors of debt maturity structure of listed real estate companies in China.
Keywords:real estate industry, debt maturity structure, pooled OLS model, fixed effects model
Table of Contents1.0 Introduction
Since Miller and Modigliani (Modigliani & Miller, 1958)introduced a study of capital structure of modern corporates in 1958, there is an increasing number of researches and documents examining capital structure theory. Along with the innovation and development of the capital structure theory, the choice of leverage and of debt maturity begin to catch scholars’ attention. Based on the development of the capital structure theory, Ho and Robinson(Ho & Robinson, 1994)proposed four theories in the field of debt maturity structure study, including the theory of trade-off, the theory of agency cost, hypothesis regarding information asymmetry, and hypothesis of debt maturity structure with respect to tax. Besides the four fundamental theories, a series of derivative studies were carried out revolving around the influential factors (Bradley et al., 1984)and determinants (Titman & Wessels, 1988)of debt structure later on.
While most of the empirical studies on debt maturity structure focus on situation in developed countries (Cai et al., 2008), several attentions have been put on developing countries and emerging markets. The financing environment and capital market in China is different from the majority of developed countries, which is under the transformation and evolution. In addition, the unbalanced development of capital markets across different industries and lack of protection for investors make the debt maturity structure more complicated for the listed companies in China. In 2008, the market experienced the global financial crisis and a new corporate income laws, leading to dynamic environment for firms to construct their debt maturity structure. As a result, considering the uniqueness of capital market in China, it is worth studying how to apply the four debt maturity structure theories to explain the debt maturity structure issue in the market of China as well as the determinant factors.
The acceleration of urbanization and the economic development in China lead to an unprecedented growth in China’s real estate industry (Calabro, 2012). In the last two decades, real estate industry has become one of the pillar industries in China that pushes the economic growth national wide. Real estate industry is regarded as a capital-intensive sector, which indicates that the real estate companies need to maintain sufficient capital for its long business cycle. China has not established a perfect and mature financial market yet; as a result, real estate companies still rely largely on bank loans and other forms of debts. According to statistics, 198 publicly listed real estate companies in China have an average of the debt to equity ratio of 96% in 2015, increased by 7.23% from 2014 (Ting, 2016). In addition, most of them have an irrational debt maturity structure; with current liabilities consisting a large portion of total liabilities, the debt maturity structure may not only result in huge financial risk to the firm, but also negatively influence the security of the whole financial system in China and the stability of economy (Chan et al., 2016). Considering the important role of real estate industry in capital market of China, it is necessary to carry out empirical research to acquire an in-depth understanding of debt maturity structure of listed real estate firms in China.
Recently, most empirical studies debt maturity structure revolves around companies in developed countries and focus on all listed firms rather than a specific industry sector. While the real estate industry is a major driven factor of the economic growth in China, intense study on the debt maturity structure and influential factors is necessary. This paper firstly provides a literature review on relevant theories of the debt maturity structure and a summary of empirical research results. Based on these literatures and empirical researches, this study will analyze debt maturity structure situation in China and the factors that influence the choices of listed real estate companies in China with respect to the debt maturity structures. Subsequently, by statistic models, this study will investigate the relations between debt maturity structure and factors that influence the choice regarding the debt maturity of listed real estate companies in China. An empirical study by pooled OLS and fixed effects will examine nice factors that may have close relations with the debt maturity structures, including Growth opportunities, firm size, firm quality, age, leverage, Volatility of earning, liquidity, effective tax rate, and assets maturity structure. Finally, according to the results from this empirical research, the paper puts forwards several corresponding recommendations to address the existing problems in the debt maturity structures of listed real estate companies in China.
This section provides brief literature reviews regarding four debt maturity theories, empirical studies with respect to determinants and factors influencing the debt maturity structure, and related methodology to carry out the researchers on debt maturity structure.
Existing literatures indicates that the theories with respect to debt maturity structure falls into the following four categories: agency costs (Jensen, 1986), asymmetric information theory (Flannery, MJ, 1986), the effective tax theory(Hart & Moore, 1991), and the matching theory (Stohs & Mauer, 1996).
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