Transformations  in
Business & Economics

THE EFFECT OF CASH FLOW ON THE CAPITAL STRUCTURE DYNAMIC ADJUSTMENT: EVIDENCE FROM CHINESE LISTED COMPANIES
Lining Gan, Pengzhen Wei, Junqiu Wang, Xiaosong Zheng

ABSTRACT. This paper studies the effect of cash flow on the capital structure dynamic adjustment from the point of transaction cost, ownership nature of ultimate controller and financing constraints by samples of Chinese listed companies from 1998 to 2011. If the transaction cost is lower, companies showed the tendency to target capital structure adjustment; when the cash flow is not enough to adjust the capital structure deviation part, companies showed deviation from the target capital structure. However, when the cash flow is more than capital structure deviation, state-owned and non-state-owned companies both show the tendency of excessive adjustment, whether excessive debt or insufficient liabilities. We further study the influence of financing constraints on capital structure adjustment. The results show that compared with non-state-owned companies, the capital structure adjustment of state-owned companies is significantly affected by financing constraints. On the contrary, financing constraints has no significant influence on non-state-owned companies.

KEYWORDS: cash flow, capital structure dynamic adjustment, ownership, financial constraints.

JEL classification: G32, G15.