Capital Structure Adjustment in China's Construction Companies: An Empirical Evidence

International Journal of Advanced Research in Economics and Finance
e-ISSN: 2682-812X | Vol. 3, No. 3, 38-49, 2021

http://myjms.mohe.gov.my/index.php/ijaref
Capital Structure Adjustment in China’s Construction

Companies: An Empirical Evidence
Xiang Hu1, Eliza Nor1*
1
School of Management, Universiti Sains Malaysia
*Corresponding Author: eliza.nor@usm.my
Accepted: 15 August 2021 | Published: 1 September 2021

_________________________________________________________________________________________
Abstract: A two-stage dynamic partial adjustment model is estimated by GMM estimator using
panel data of China’s listed construction companies over the period of 2009- 2018. This study
examines ten empirical determinants of capital structure adjustment of China’s listed
construction companies comprising both company specific and macroeconomic factors. We
use OLS and Probit regression analysis to estimate the effect of selected determinants on
adjustment speed and adjustment direction, respectively, and we also use difference-in-
difference method to examine the effects of macroeconomic policies on capital structure
adjustment. This research findings show that capital structure deviation, GDP growth,
exchange rate and stock market development have a positive impact on capital structure
adjustment of China’s listed construction companies. However, company size, growth and
credit squeeze have a negative impact on capital structure adjustment of China’s listed
construction companies. Moreover, state-owned and large listed construction companies can
adjust capital structure faster in an economic stimulus.
Keywords: Dynamic capital structure model; adjustment speed; company characteristics;

macroeconomic states; construction companies
___________________________________________________________________________
1. Introduction
In 2018, construction industry has become the fourth largest industry in China after
manufacturing, agriculture and real estate, the gross output value of China’s construction
industry accounted for 6.9% of the China’s total GDP in 2018, although construction industry
has become an important driving force of China’s national economy, China’s construction
companies have a higher average debt level than companies in other industries, in 2018, the
average debt ratio of China’s listed construction companies was 71.3%, which was the highest
among all listed companies in other China’s non-financial industries. Even worse is the long-
term low economic efficiency of China’s construction companies, the average profit of China’s
construction companies during 2009-2018 was only around 3% in accordance with the statistics
of the National Bureau of Statistics. High debt and low economic yield can cause a string of
financial problems to the China’s construction companies.
As a pillar industry in China, it can be seen that if a holistic bankruptcy risk has risen in the
construction industry, it may threaten the entire China’s financial market or even trigger a
financial crisis. However, the unhealthy financial situation of China’s construction companies
may not only threaten financial market, but also threaten survival of the companies. Good
financial condition indicates the well-functioning and good development of a company. A
company with target capital structure is generally considered to have a good financial
condition, because company value is maximized under the state. And how fast an company can
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e-ISSN: 2682-812X | Vol. 3, No. 3, 38-49, 2021
adjust its capital structure toward target measures how capable the company can improve its
financial condition, the faster the adjustment speed, the better the ability of the company to
manage its capitals, and the easier the company to achieve a good financial condition. The
prerequisite for determining adjustment speed of capital structure is to identify the target capital
structure, many researchers believe that the target capital structure of a company is jointly
decided by a series of external and internal influencing factors of the company, therefore, it is
important to find suitable factors to assess the target capital structure of a company. Adjustment
speed toward target and its influencing factors can be then determined.
In last decade, many scholars have been conducting researches on dynamic adjustment of
capital structure, the research conclusions are various due to applying different research
methods. This research applies a pertinent research method of Cook and Tang (2010), it aims
at helping China’s construction companies to better understand how their adjustment toward
target capital structure is influenced by company characteristics and macroeconomic states.
Thereby reducing adjustment cost, improving company value and maintaining a healthier
financial condition by optimizing the company components and the behaviors of responding
macroeconomic changes. This research uses a sample of 47 China’s listed construction
companies over the 2009-2018 period to conduct the research. And the research structure is
arranged as follow: Chapter two is the literature review, chapter three introduces the research
methods, chapter four is the empirical results, chapter five is the discussion, and chapter six is
the research conclusion.
2. Literature Review
Capital structure has always been a key subject in research realm of corporate finance. MM
Theory proposed by Modigliani and Miller (1958) is the foundation for contemporary optimal
capital structure theories. Because the assumptions of MM Theory are not in line with actual
economic situations, many researchers have amended the assumptions of MM Theory and
proposed the Trade-off Theory, Agency Cost Theory, Pecking Order Theory, etc. Most
empirical studies confirms that every company has an optimal capital structure (DeAngelo and
Maulis, 1980; Titman and Wessels, 1988; Rajan and Zingales, 1995; Hovakimian et al,. 2001;
Harford et al., 2009; Tao, 2015; Seeman and Jacobson, 2016; Rahman, 2019).
However, the actual capital structure of most companies is investigated and found to be
generally not at the optimal level, so companies need to adjust their capital structure often
toward optimal level to avoid the financial risks caused by capital structure deviation. Study
on capital structure adjustment can be traced back to 1984. Jalivand and Harris (1984) found
that company financing behavior is a process of continuous adjustment of current capital
structure to its optimal level, and the adjustment of capital structure can enhance company
value (Lööf, 2004). Fischer et al. (1989) found that the optimal capital structure is not a
stationary value but a variable value, the capital structure can be adjusted at any time but the
existence of adjustment cost will impede company to make adjustment, therefore, they
established a dynamic capital structure adjustment model with consideration of adjustment
cost, and the study results showed that the capital structure adjustment has a negative
correlation with adjustment cost, the lower adjustment cost allows company to make greater
adjustment. The existence of adjustment cost causes difficulty for company to fully adjust
capital structure to optimal level (Rajan and Zingales, 1995), and the size of adjustment cost
plays a decisive role in capital structure adjustment decision (Ozkan, 2001). Faukender et al.
(2012) argued that a company will adjust capital structure only when the adjustment benefit
exceeds the cost, the company may rather not adjust its capital structure even the capital
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structure is not at optimal level if the adjustment cost go beyond the adjustment benefit
(Drobetz and Wanzenried, 2006). And many more recent studies have also affirmed the impact
of adjustment cost on adjustment speed (Oztekin and Flannery, 2012; Haron et al., 2013;
Haron, 2014; Daher et al., 2015).
The latest researches on capital structure adjustment are mainly to analyze the influencing
factors of adjustment speed. Researchers Cook and Tang (2010) have proved the effect of
company specific factors on adjustment speed of capital structure, and Jalivand and Harris in
1984 found that the adjustment speed of capital structure is closely related to company size,
interest rates and stock prices. Ozkan (2001) have researched the data of 390 United Kingdom
companies from 1984 to 1996 and proved that the larger companies have faster adjustment
speed of capital structure, however, better company growth and liquidity lead to slower
adjustment speed. Banerjee et al. (2004) found that company size and adjustment speed are
positively correlated, company growth rate and adjustment speed are negatively correlated in
United States and United Kingdom companies. Tong (2006) supported that the size, growth,
profitability and shareholding proportion of the largest shareholder have a positive influence
on adjustment speed, and return volatility has negative influence on adjustment speed. Lian
and Zhong (2007) used the data of 427 Chinese listed companies and found that most listed
companies have a debt ratio which is lower than optimal level, and company size, company
growth and deviation degree have significant impacts on capital structure adjustment speed.
Many existing researches have also proved the influences of company characteristics on
company capital structure adjustment (Byoun and Rhim, 2005; Flannery and Rangan, 2006;
Hovakimian and Li, 2011. Brendea, 2014; Belkhir et al. 2016).
There are many researches have examined and proved that macroeconomic states can impact
the speed of capital structure adjustment. Warr et al., (2012) found that capital structure can be
adjusted faster in a developed capital market, a sound legal system gives better protection to
creditors (Haselmann and Wachtel, 2010) and makes creditors have stronger willingness to
make loans (Agrawal, 2013), which increases the capital flow in market and makes it easier for
companies to obtain capital and adjust their capital structure (Huang et al., 2014). The stock
price fluctuation also has an important impact on capital structure adjustment with an
explanatory power of 74% (Kong and Xue, 2005). Drobetz and Wanzenried (2006) found that
the high inflation and economic growth can speed up the adjustment speed of capital structure.
Nivorozhkin (2004) investigated the optimal capital structure and capital structure adjustment
speed of Czech and Bulgarian private companies, the results showed the private companies in
Czech have slower adjustment speed than in Bulgaria, and the reason may be a more
conservative economic policy was implemented in Czech than in Bulgaria.
And many researchers stated that capital structure was adjusted faster in a better economy (with
low macroeconomic risks), and vise verse (Drobetz and Wanzenried, 2006; Hackbarth et al,
2006; Cook and Tang, 2010; Oztekin and Flannery, 2012; Baum et al, 2016). There are Chinese
researchers found that the adjustment speed of company capital structure toward the target is
faster when there is a better industry development (Pan, 2018; Wu et al., 2019). Some
researchers have proved a negative relation between credit squeeze and capital structure
adjustment speed (Drobetz and Wanzenried, 2006; Cook and Tang, 2010; Wang, 2014),
however, Chinese researcher Shen (2018) did not find significant impact of credit squeeze on
speed of capital structure adjustment.
To sum up the literature review, all companies have an optimal capital structure, however, their
actual capital structure generally deviate from the optimal level, and their capital structure
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adjustment is influenced by differing determinants. This study is devoted to investigating the

China’s listed construction companies’ target capital structure, speed of capital structure
adjustment and the determinants of adjustment speed.
3. Data and Methodology
(1) Data
This research selects 47 China’s listed construction companies as the research samples and uses
panel data for 10 years (2009-2018) to run regression analysis, the sample selection criteria are
as follow: (1) the companies were continuously operating from 2009 to 2018. (2) The
companies in ST (Special Treatment: The company had deficits for two years running) and PT
(Particular Transfer: The trading of company stock is suspended on exchange) status for two
consecutive years are excluded. (3) The outliers are excluded. According to the three criteria
above, we get 470 sample observations from 47 companies (balanced panel data). All financial
data comes from the CSMAR financial research database.
(2) Research Methodology

Dynamic Model of Optimal Capital Structure
We use the linear equation as the basis to fit the optimal capital structure through regression
analysis, the method has been proven by Hovakimian et al. (2001).
∗
𝐶𝑆𝑖,𝑡 = 𝛾𝑚𝑎𝑐𝑟𝑜𝑡 + β𝑋i,t (3)
Target capital structure is affected by a set of macroeconomic variables 𝑚𝑎𝑐𝑟𝑜𝑡 and the
company characteristic variables 𝑋i,t in year t. Hovakimian et al. (2001), Cook and Tang (2010)
and other literatures used two-stage approach to estimate speed of capital structure adjustment
based on an optimal capital structure proxied from Equation (3). That is, putting Equation (3)
into Equation (1), we get:
𝐶𝑆i,t = (1 – 𝜆) 𝐶𝑆i,t−1 + 𝜆β𝑋i,t + 𝜆𝛾𝑚𝑎𝑐𝑟𝑜𝑡 + 𝜀i,t (4)
1 – 𝜆 represents the vector of lagged capital structure, where 𝜆 is the capital structure deviation
form target level from period t-1 to period t. So the regression estimate 1 – 𝜆 which will then
be converted to the speed of capital structure adjustment 𝜆. The study follows the practices of
Faulkender et al. (2012) and Li et al (2017) to run equation (4) by using system GMM.
The macroeconomic and company characteristic target determinants are selected as follows:
a. Macroeconomic target determinants

According to Trade-off Theory, the optimal capital structure is determined by balancing
tax benefits and bankruptcy costs of debt, however, both the tax benefits and bankruptcy
costs of debt are related to macro economy, so this study selects three macroeconomic
factors to determine the optimal capital structure which were applied in the researches of
Drobets and Wanzenried (2006), Cook and Tang (2010) and Yuan et al. (2006). First, fiscal
expenditure, according to the trade-off theory, tax rate determines the company capital
structure, tax rate can also reflect the stance of fiscal policy. As the fluctuation of corporate
income tax rate in China is small, so this study choose the annual growth rate of fiscal
expenditure as substitute for tax rate. Second, interest rate, the cost of debt financing
increases when the actual loan interest rate increases, at the time, companies will choose
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equity over debt financing. Third, the development of capital market, the capital market
development is a determinant of optimal capital structure because it can influence the debt
financing of companies, and we use corporate bond issuance / GDP as proxy of capital
market development.
b. Firm characteristic target determinants

Refer to the researches of Rajan and Zingales (1995), Hovakimian et al. (2001), Fama and
French (2002), and Drobets and Wanzenried (2006) on influencing factors of capital
structure, we select company size, growth, tangible assets, non-debt tax shield, profitability
and ownership structure as the determinants of optimal capital structure.
Model of Adjustment Speed

In real economy, it is difficult to fully minimize capital structure deviation to the target level
by reason of existence of adjustment cost, therefore, most companies only be able to partially
adjust capital structure or retain their existing capital structure, and some companies may have
to reversely adjust capital structure.
This research draws on the Partial Adjustment Model from Fama and French (2002) to describe
the adjustment speed toward target capital structure of China’s listed construction companies,
and the model is shown as:
∗
𝐶𝑆𝑖,𝑡 －𝐶𝑆𝑖,𝑡−1 ＝𝜆𝑖,𝑡 (𝐶𝑆𝑖,𝑡 －𝐶𝑆𝑖,𝑡−1 ) (1)
𝐶𝑆𝑖,𝑡 denotes actual capital structure of listed construction firms in year t. 𝜆𝑖,𝑡 indicates the
capital structure’s adjustment speed. We make further transposition and have the expression
of 𝜆𝑖,𝑡 :
𝐶𝑆 －𝐶𝑆
𝜆𝑖,𝑡 ＝ 𝐶𝑆 ∗𝑖,𝑡－𝐶𝑆 𝑖,𝑡−1 (2)
𝑖,𝑡 𝑖,𝑡−1
𝜆𝑖,𝑡 ＝1 means the company capital structure has been fully adjusted to the target level in
year t. 𝜆𝑖,𝑡 ＝0 means the capital structure in year t is identical to the capital structure in year t-
1, or the capital structure remain stagnant. 0 < 𝜆𝑖,𝑡 < 1 means the company capital structure has
been partially adjusted. 𝜆𝑖,𝑡 > 1 means company capital structure has been unduly adjusted.
𝜆𝑖,𝑡 < 0 means there is a reverse adjustment occurred, the actual adjustment direction runs
contrarily to the optimal capital structure.
Regression Model
1. Linear Regression Model
a. Baseline model
𝜆𝑖,𝑡 = 𝜃0 + 𝜃1 𝐶𝑂𝑀𝑖,𝑡 + 𝜃2 𝑀𝐴𝐶𝑡 +𝑤𝑖 +𝑢𝑡 +𝜀𝑖,𝑡 (5)
𝜆𝑖,𝑡 denotes the speed of capital structure adjustment of company 𝑖 in year 𝑡; 𝜃0 , 𝜃1 and 𝜃2
are the regression coefficients; 𝐶𝑂𝑀𝑖,𝑡 denotes the company variables of company 𝑖 in year 𝑡,
𝑀𝐴𝐶𝑡 denotes the macroeconomic variable; 𝑤𝑖 is the unobservable company effect, 𝑢𝑡 is the
unobservable time effect, and 𝜀𝑖,𝑡 is the random error term.
b. Difference-in-differences model
Research uses DID (Difference-in-difference) model to analyze the impact of macro-economic
regulations on capital structure adjustment speed. On the basis of model (5), DID model (6)
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model adds a dummy variable 𝐷𝑡 (macro-economic policy), and 𝐷𝑡 x 𝐺𝑟𝑜𝑢𝑝𝑖 (company group
with different size and ownership). The DID model is shown as follow：
𝜆𝑖,𝑡 = 𝜃0 + 𝜃1 𝐶𝑂𝑀𝑖,𝑡 + 𝜃2 𝑀𝐴𝐶𝑡 +∅𝐷𝑡 +𝜂(𝐷𝑡 *𝐺𝑟𝑜𝑢𝑝𝑖 ) +𝑤𝑖 +𝑢𝑡 +𝜀𝑖,𝑡 (6)
Compared with model (5), model (6) adds item ∅𝐷𝑡 and 𝜂(𝐷𝑡 ∗ 𝐺𝑟𝑜𝑢𝑝𝑖 ). ∅ represents the
dummy variable coefficient, 𝐷𝑡 denotes the dummy variable of macro-economic regulation; 𝜂
is the coefficient DID variable, 𝐷𝑡 x𝐺𝑟𝑜𝑢𝑝𝑖 denotes the DID variable. 𝐺𝑟𝑜𝑢𝑝𝑖 denotes the
dummy variable of company group, 𝐺𝑟𝑜𝑢𝑝𝑖 is 1 if company 𝑖 in Treatment Group, 𝐺𝑟𝑜𝑢𝑝𝑖 is
0 if company 𝑖 in Control Group.
2. Discrete Choice Model

This research uses adjustment direction (positive and negative) of capital structure as
dependent variable to establish Binary Choice Model, and the Binary Choice Model is also
divided into a baseline model and a DID model.
a. Baseline model
𝑦𝑖,𝑡 = 𝜃0 + 𝜃1 𝐶𝑂𝑀𝑖,𝑡 + 𝜃2 𝑀𝐴𝐶𝑡 +𝑤𝑖 +𝑢𝑡 +𝜀𝑖,𝑡 (7)
In model (7), 𝑦𝑖,𝑡 is the dependent variable of binary choice, 𝑦𝑖,𝑡 is 1 for positive adjustment
companies and 0 for negative adjustment companies. The other items are same as in model (5).
b. Difference-in-difference model
𝑦𝑖,𝑡 = 𝜃0 + 𝜃1 𝐶𝑂𝑀𝑖,𝑡 + 𝜃2 𝑀𝐴𝐶𝑡 +∅𝐷𝑡 +𝜂(𝐷𝑡 x𝐺𝑟𝑜𝑢𝑝𝑖 ) +𝑤𝑖 +𝑢𝑡 +𝜀𝑖,𝑡 (8)
𝑦𝑖,𝑡 is 1 for positive adjustment companies and 0 for negative adjustment companies. The other
items are the same as in model (6). The definition and measurement of variables are shown in
the table below, the measurement of actual capital structure follows the studies of Flannery and
Rangan (2006) and Cook and Tang (2010) uses interest-bearing debt ratio (interest-bearing
debt / total assets).
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Table 1: Definition and measurement of variables

Dependent Variable Variable Definition Index Measurement
Adjustment speed of
Capital Structure See formula (2)
capital structure
Capital structure is fully,
Postive adjustment partially and unduly adjusted =
1, otherwise = 0.
Capital structure is suspended
Negative adjustment and reversed adjusted = 1,
otherwise = 0.
Independent Variable
Capital Structure ｜Actual debt ratio - Optimal

Company Factors DEV
Deviation debt ratio｜
Size LNS ln(asset)
(Total asset for the current year -
Total asset for the previous year)
Growth GROW
/ Total asset for the previous
year
Net income / Average total
Profitability PROF
assets
Current assets / Current
Asset liquidity CL
liabilities
(GDP for the current year - GDP
Macroeconomic
GDP growth rate GDPR for the previous year) / GDP for
Factors
the previous year
Exchange rate EXC RMB / US dollar
Stock market
STOCK Stock market value / GDP
development
Year 2010-2011=1, otherwise
Credit squeeze(D1)
year=0.
Year 2009-2015=1, otherwise
Economic stimulus(D2)
year=0.
(D1): Small company=1, large
Dummy Variables Company size(Group 1) company=0. (D2): Large
company=1, small company=0.
(D1): Private company=1, state-
Company owned company=0. (D2): State-
ownership(Group 2) owned company=1, private
company=0.
4. Results and Discussion
(1) Descriptive Statistics of Variables

Table 2 presents the descriptive statistics for the raw data of all variables used in this study,
and Table 3 presents the matrix correlation between the continuous variables used in this study.
Table 2: Descriptive Statistics of variables
Mean Std.Dev. Min Max

-2.037 50.230 -977.161 135.282
DEV 0.221 0.147 0.000 0.688
LNS 23.256 2.031 16.185 28.253
GROW 0.177 0.618 -0.917 12.727
PROF 0.028 0.094 -0.84 1.560
CL 1.346 1.943 0.087 35.020
GDPR 0.110 0.038 0.070 0.184
EXC 0.153 0.006 0.146 0.163
STOCK 0.582 0.129 0.403 0.775
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Table 3: Matrix of correlations
DEV LNS GROW PROF CL

DEV 1
LNS 0.04 1
GROW -0.079* -0.02 1
PROF -0.181** -0.066 0.004* 1
CL 0.012 0.013 0.02 0.041 1
According to Table 3, the correlation between independent variables is weak, so there is a low
possibility of multicollinearity problem.
Table 4: OLS and Probit Analysis

Variable OLS Probit
DEV 28.435* 0.956*
(0.056) (0.076)
LNS -0.182 -0.061**
(0.377) (0.031)
GROW -3.612 0.581*
(0.669) (0.053)
PROF -3.859 -0.039
(0.487) (0.664)
CL -0.739 -0.015
(0.984) (0.632)
GDPR 0.047 0.053**
(0.249) (0.019)
EXC 0.173 0.109***
(0.987) (0.000)
STOCK 0.746 0.092***
(0.152) (0.003)
Constant -12.045 -8.855**
(0.369) (0.048)
Company
YES -
effect
Time effect YES -
Obs 470 470
R2 0.024 -
According to the results of multiple linear regression shown in Table 4, (1) Capital structure
deviation (DEV) is the only factor which has significant influence on adjustment speed. (2)
Companies with greater capital structure deviation have relatively faster adjustment speed. (3)
R2 of the multiple regression model is too low (0.024), so the model does not have sufficient
explanatory power.
The findings of the binary regression are (1) the coefficient of capital structure deviation (DEV)
is 0.956, which means it is less likely for companies to have stagnant or reverse capital structure
adjustment when the capital structure deviation is large. The greater the capital structure
deviation, the greater the possibility for companies to positively adjust capital structure, it is
consistent with the result in OLS regression analysis. (2) Company size (LNS) is negatively
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correlated with the probability of a company to positively adjust its capital structure, this may
be because larger companies need more funds to adjust their capital structure, so compared
with smaller companies, the requirement of a large fund makes it more difficult for large
companies to adjust capital structure, so the probability of large companies to positively adjust
capital structure is lower than small companies. (3) The regression coefficient of company
growth (GROW) is -0.581 indicates that the companies with better growth have less probability
to positively adjust their capital structure, this may be because the companies with better
growth generally have a relatively large demand for funds with the purpose to meet their own
development needs, so they may choose to ignore the capital structure deviation and do not
adjust capital structure in the rapidly developing stage, therefore, the company growth has a
negative relationship with the positive adjustment of capital structure. (4) GDP growth rate
(GDPR) has a significantly positive influence on the positive adjustment. Companies are able
to obtain more funds in capital market to make capital structure adjustment in a good
macroeconomic condition, so the capital structure is very likely to be positively adjusted in a
flourishing economy. (5) The exchange rate of Chinese Yuan (EXC) and the capital structure
adjustment are positively correlated, the higher the exchange rate of Chinese Yuan, the higher
the possibility for company to reduce capital structure deviation, as more China’s listed
construction companies have entered into the overseas markets, the international loanable
funds of companies are increasing along with the international businesses, an increase in
exchange rate of Chinese Yuan can bring exchange rate benefit to companies and reduce their
financing cost, they thus can adjust capital structure to target level easier. (6) There is a positive
relation between stock market development (STOCK) and capital structure adjustment. The
better the stock market development, the higher the probability for a company to positively
adjust capital structure, because a stock market with better development offers more
opportunities for companies to obtain funds to adjust capital structure and shorten the deviation.
Table 5: Difference-in-difference analysis

(1) (2) (3) (4)
OLS Probit
Variable Ownership Size Ownership Size
Credit squeeze -2,330 -2,607 -0.130** -0.184**
(0.985) (0.636) (0.011) (0.035)
Economic stimulus 0.486 0.395 -0.442 -0.586
(0.365) (0.277) (0.399) (0.383)
Credit squeeze
-700.8 -0.166
(private company)
(0.550) (0.138)
Economic stimulus
(state-owned 0.445 0.328***
company)
(0.361) (0.000)
Credit squeeze
-0.883 -0.030
(small company)
(0.693) (0.122)
Economic stimulus
0.125 0.205*
(large company)
(0.847) (0.086)
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Multiple linear regression results in Table 5 show that the credit squeeze and economic
stimulus have no significant effect on speed of capital structure adjustment of China’s listed
construction companies.
In line with binary regression results, we know (1) credit squeeze can increase the possibility
of reverse adjustment of capital structure. Economic stimulus has no significant influence on
capital structure adjustment. (2) The results of DID regression show that economic stimulus
can significantly increase the possibility of state-owned and large construction companies to
positively adjust capital structure. Credit squeeze does not have significantly different effects
on companies with different sizes and ownership types.
In summary, the multiple linear regression cannot efficiently explain the adjustment speed. The
reason may be that the value of adjustment speed is highly discrete, because in general, a
company adjusts its capital structure once over a period of time, so the collected value of
adjustment speed is not precisely continuous, as a result, the multiple linear regression is
difficult to be used to examine the influencing factors of speed of capital structure adjustment.
5. Conclusion
The research conclusions of this research include: (1) China’s listed construction companies
have high cost in the process of dynamically adjusting capital structure, so the capital structures
of most China’s listed construction companies have only been partially adjusted or reverse
adjusted. Moreover, different construction companies have greatly different speeds of capital
structure adjustment. (2) Adjustment behavior is significantly affected by company
characteristics and macroeconomic states. The deviation degree of capital structure, company
size, company growth, GDP growth rate, exchange rate and stock market development claim
significant relationship with capital structure adjustment. Specifically, the greater the deviation
of capital structure, the greater the probability for companies to have positive adjustment; the
companies with larger size or better development have lower probability to positively adjust
their capital structure; in the macroeconomic states of better economy, better stock market
development, and higher exchange rate of Chinese Yuan, China’s listed construction
companies have higher probability to diminish the capital structure deviation from target level.
In summary, the results of this research have a guiding value for China’s listed construction
companies to find their target capital structure and to adjust their actual capital structure toward
target level. This research suggests that a company’s target capital structure should be adjusted
in time with changes in company’s internal and external factors, and coordinated with the
development strategy of the company. In addition, a company should actively build a dynamic
optimization mechanism for capital structure to continuously improve the company’s financing
efficiency and intrinsic value.
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Capital Structure Adjustment in China's Construction Companies: An Empirical Evidence

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International Journal of Advanced Research in Economics and Finance

e-ISSN: 2682-812X | Vol. 3, No. 3, 38-49, 2021

Capital Structure Adjustment in China’s Construction

*Corresponding Author: eliza.nor@usm.my

Accepted: 15 August 2021 | Published: 1 September 2021

Keywords: Dynamic capital structure model; adjustment speed; company characteristics;

adjustment is influenced by differing determinants. This study is devoted to investigating the

3. Data and Methodology

(2) Research Methodology

𝐶𝑆i,t = (1 – 𝜆) 𝐶𝑆i,t−1 + 𝜆β𝑋i,t + 𝜆𝛾𝑚𝑎𝑐𝑟𝑜𝑡 + 𝜀i,t (4)

a. Macroeconomic target determinants

b. Firm characteristic target determinants

Model of Adjustment Speed

𝜆𝑖,𝑡 = 𝜃0 + 𝜃1 𝐶𝑂𝑀𝑖,𝑡 + 𝜃2 𝑀𝐴𝐶𝑡 +𝑤𝑖 +𝑢𝑡 +𝜀𝑖,𝑡 (5)

2. Discrete Choice Model

𝑦𝑖,𝑡 = 𝜃0 + 𝜃1 𝐶𝑂𝑀𝑖,𝑡 + 𝜃2 𝑀𝐴𝐶𝑡 +𝑤𝑖 +𝑢𝑡 +𝜀𝑖,𝑡 (7)

Table 1: Definition and measurement of variables

Capital Structure ｜Actual debt ratio - Optimal

4. Results and Discussion

(1) Descriptive Statistics of Variables

Table 2: Descriptive Statistics of variables

Mean Std.Dev. Min Max

Table 3: Matrix of correlations

DEV LNS GROW PROF CL

Table 4: OLS and Probit Analysis

Table 5: Difference-in-difference analysis

Belkhir, M. Maghyereh, A. and Awartani, B. (2016), “Institutions and Corporate Capital

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