Capital Structures in an Emerging Market: A Duration Analysis of the Time Interval Between IPO and SEO in China

Yang Ni (niyang@sjtu.edu.cn), Shasha Guo and David Giles
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Shasha Guo: BP Canada

No 905, Econometrics Working Papers from Department of Economics, University of Victoria

Abstract: We model the durations between firms’ “Initial Public Offerings” (IPOs) and their subsequent “Seasoned Equity Offerings” (SEOs) in China during the period from 1 January 2001 to 1 July 2006. Duration analysis is applied by using the nonparametric Kaplan-Meier estimator of the hazard function, and parametric accelerated failure time models with time-varying covariates. The results of this analysis have important implications for the capital structure in emerging markets. Our evidence on financing decisions in China contradicts the predictions of both the trade-off theory and the pecking order theory. Firms do not issue equity after debt financing to offset the deviation from the target leverage ratio. Profitability is negatively related to debt ratios. Limited access to the corporate bond market and the privilege of the low effective tax rate that local governments give to firms have increased the cost of debt and decreased the benefit of debt, and make firms in China under-utilize the tax shield of debt. The most surprising finding is that profitability is positively related to the conditional probability of equity financing. Firms may intentionally manipulate the earnings to minimize the adverse section costs associated with equity financing and to meet the earnings requirement of China Securities Regulatory Commission set for SEO qualifications. Market timing is an important consideration when firms in China undertake equity financing.

Keywords: Duration analysis; conditional hazard probability; capital structure; initial public offering; seasoned equity offering; China (search for similar items in EconPapers)
JEL-codes: C16 C41 G32 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-06-19
New Economics Papers: this item is included in nep-tra
Note: ISSN 1485-6441
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Journal Article: Capital structures in an emerging market: a duration analysis of the time interval between IPO and SEO in China (2010)
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