Purpose – The purpose of this paper is to empirically examine the relation between financial leverage and investment opportunities of Chinese industrial firms, which operate in a vastly different financial environment than USA and Japanese firms. Design/methodology/approach – Multivariate regression analysis is performed using four versions of debt‐equity ratio as dependent variable to extensive firm‐level data for the 2000‐2004 period. Findings – The market total debt‐equity (MTDE) ratios of Chinese firms are significantly negatively related to their investment opportunities, indicating that Chinese firms with higher investment opportunities tend to borrow less. The results, however, reveal that the financing‐investment relation is sensitive to the approach used to measure financial leverage. The results further show that long‐term debt‐equity ratios of Chinese firms are not significantly related to their investment opportunities, suggesting that corporate long‐term debt has a minimal role in the leverage‐investment relation for Chinese firms. Practical implications – The present study opens for a further research on the determinants of the negative relation between financial leverage and investment opportunities of Chinese firms documented in this study. For this line of future research, several unique features of Chinese markets including non‐tradable shares, domestic vs foreign shares, high degree of information asymmetry need to be taken into account. Originality/value – The present study extends and updates the existing literature on the relation between financial leverage and investment opportunities of Chinese firms by providing new and concrete evidence from extensive data over a more recent period.
Managerial Finance – Emerald Publishing
Published: Jul 3, 2009
Keywords: China; Gearing; Investments; Debts; Equity capital
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