Capital Structure Premium in Multinational SOEs: Evidence from China

• DOI: http://doi.org/10.1111/rode.12221
• Author: Xun Zhang,Rui Zhang
• Published date: 01 February 2016
• Date: 01 February 2016

Capital Structure Premium in Multinational SOEs:

Evidence from China

Rui Zhang and Xun Zhang*

Abstract

We investigate the relationship among multinational operations, ownership and capital structure using

data from China’s A-share listed companies. We find that, in general, multinational enterprises (MNEs)

have lower leverages than domestic enterprises (DEs). More importantly, we document a capital

structure premium in China’s multinational state-owned enterprises (SOEs). Since the state supports

multinational SOEs that promote overseas national strategy, these multinational SOEs will have higher

credit availability and therefore higher debt–equity ratios. This study sheds light on the Chinese

government’s impact on firm’s creditability.

1. Introduction

Numerous studies have examined the relationship between multinational operations

and capital structure. Existing evidence, however, is largely inconclusive because of

different legal frameworks, institutional structures and developments of capital

markets (Booth et al., 2001). Ownership also plays an important role in this

relationship. At least, there is sufficient inference regarding why multinational state-

owned enterprises (SOEs) would have lower debt–equity ratios than domestic

enterprises (DEs). It is believed that SOEs suffer from agency problems and insider

control (Lin and Tan, 1999), and are less efficient. Moreover, multinational operations

would incur macro-economic risk and political risk (Burgman, 1996). Therefore, it

seems reasonable to infer that multinational SOEs can bear lower debt–equity ratios.

In this paper, we find that multinational SOEs have a premium in debt ratio

compared with DEs, which we define as “capital structure premium.” Given the

recognized agency problem suffered by China’s SOEs, as well as China’s rapidly

growing outward direct investment (ODI) since 2000, it is interesting and important

to understand why China’s multinational SOEs enjoy such a capital structure

premium.

We note that China’s government intervention is playing a major role in SOEs’

decisions. Tong and Green (2005) find that corporate strategy is a significant

determinant of capital structure. Hence, the state may regard some multinational

SOEs as vehicles for overseas national strategies, such as acquisitions of natural

resources and technologies. Since the operations of these SOEs reflect the state’s

will, the state is more likely to support them. Therefore, because of national

*Rui Zhang: National School of Development, Peking University, Beijing, China. Xun Zhang

(Corresponding author): Beijing Normal University, Beijing, China. Tel: +86-15201468521; E-mail:

zhangxun@bnu.edu.cn. He is also affiliated to Shanghai Finance Institute, Shanghai, China. The authors

wish to thank Miaojie Yu and the anonymous referee for their insightful suggestions. The paper is

supported by “the Fundamental Research Funds for the Central Universities” and China Postdoctoral

Science Foundation funded project (2015M580055).All errors are those of the authors.

Review of Development Economics, 20(1), 283–293, 2016

DOI:10.1111/rode.12221

©2016 John Wiley & Sons Ltd