Capital structure and financial distress in China’s real estate sector: a perspective from sales tournament

Edward Chan, Eddie C. M. Hui, Jianfu Shen () and Liya Zhang
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Edward Chan: Hong Kong Polytechnic University
Eddie C. M. Hui: City University of Hong Kong
Jianfu Shen: Hong Kong Polytechnic University
Liya Zhang: Hong Kong Polytechnic University

Palgrave Communications, 2025, vol. 12, issue 1, 1-15

Abstract: Abstract The real estate sector in China has long been characterized by excessive leverage and over-investment, which culminated in widespread defaults since 2021. Given that credit in China is more readily extended to large developers, this study explores how sales tournaments, a competitive, race-to-the-top behavior, shape capital structure decisions, investment patterns, and financial distress in China’s real estate market. Using a sample of listed real estate developers from 2013–2022, our findings reveal that developers who achieve higher sales rankings significantly increase their debt ratios. This effect remains robust in a Regression Discontinuity analysis, Propensity Score Matching (PSM) analysis, as well as using alternative sales tournament and leverage measures. Moreover, the positive impact of sales rankings on debt ratios is pronounced for non-state-owned enterprises but not for state-owned ones. Further analysis shows that developers appearing in sales rankings exhibit higher investment growth than their counterparts outside the rankings. Additionally, developers who climb the sales ranking are more likely to experience financial distress during industry downturns. This study contributes to capital structure theories by offering new insights into the financing decisions of Chinese real estate developers.

Date: 2025
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DOI: 10.1057/s41599-025-05154-7

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