Macro leverage ratio of government departments and the dynamic adjustment of corporate capital structure

Ping Wang and Rui Zhao

International Review of Financial Analysis, 2025, vol. 102, issue C

Abstract: Previous theoretical and empirical research has suggested that the government's expansion of economic activities, such as financing and investment, can lead to a lower level of corporate capital structure. Thus, this study is to examine the impact of the government's macro leverage on the dynamic adjustment of corporate capital structure (both short- and long-term) in the context of China. Using a compound one-step regression equation in a capital structure dynamic adjustment model, we found that the macro leverage ratio of Chinese government departments increases the dynamic adjustment speed of corporate capital structure, with a stronger influence on over-indebted firms compared to under-indebted firms. Specifically, when the macro leverage ratio of Chinese government departments increases, the over-indebted firms adjust at a faster rate toward their target long-term capital structure than the under-indebted firms. Conversely, the under-indebted firms adjust at a faster rate toward their target short-term capital structure than the over-indebted firms. These results are robust to alternative measures of capital structure and to endogeneity concerns.

Keywords: Macro leverage ratio of government departments; Corporate capital structure; Corporate debt maturity; Dynamic adjustment model (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:102:y:2025:i:c:s1057521925001164

DOI: 10.1016/j.irfa.2025.104029

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