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| Is the Debt Default of Non-state-owned Firms Driven by Internal Factors？ From the Perspective of Short-term Loans for Long-term Investment and Diversification |
| LIU Haiming, BU Xiaoning
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| School of Finance, Shandong University of Finance and Economics |
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Abstract In China, private enterprises occupy an important position. The Chinese government attaches great importance to the development of private enterprises and has introduced a series of measures including financial policies to encourage and support the development of private enterprises. In recent years, this development has encountered some difficulties, including frequent debt defaults. Between 2014 and 2021, bond market defaults became more frequent, with 339 corporate bonds in default, 74.6% of which were issued by private enterprises. This paper seeks to determine whether the main causes of private enterprises' debt default are internal factors or the external economic environment. Investigating this question has implications for how the government supports and guides private enterprises to overcome their difficulties, boost the economy, and achieve high-quality economic development.
To test whether private firms' debt default is driven by internal or external factors, this paper analyzes the impact of two important corporate behaviors on private firms' debt default, i.e., short-term loans for long-term investment (abbreviated as “SFLI” hereafter) and diversification. These two perspectives are chosen for two reasons. First, SFLI and diversification are important corporate decision-making behaviors in China. Diversification and SFLI are prevalent among private firms and have an impact on their value and risk. Second, SFLI and diversification can consistently influence firms' debt default from a theoretical perspective. On the one hand, the debt default of private enterprises may be mainly driven by internal factors. Internal factors refer to private entrepreneurs focusing on their face and enterprises blindly chasing expansion, causing private enterprises to default on their debts. Under this hypothesis, important decisions made by entrepreneurs such as SFLI and diversification are irrational and will increase their debt default. On the other hand, private enterprises' debt default may be mainly driven by external factors, i.e., the macroeconomic and institutional environment may be the main factor driving firms' debt default. Under this hypothesis, SFLI and diversification are the results of rational management decisions and will not increase firms' debt default.
Using a sample of Chinese listed private firms from 2003 to 2018, we find that both SFLI and diversification increase the likelihood of debt default for private firms, suggesting that internal factors or private entrepreneurs' own irrational decisions are the main cause of debt default. In terms of the transmission mechanism, SFLI and diversification lead to lower profitability, higher over-leverage, and higher agency costs, which in turn lead to debt default. In terms of heterogeneity, the credit crunch amplifies the effect of SFLI on private firms' debt default, while industrial support policies also increases this effect. Finally, diversification and SFLI by private enterprises do not always lead to default. This paper implies that in addition to guiding financial institutions to support private enterprises, given the cultural background and psychological characteristics of entrepreneurs, authorities should encourage private enterprises to implement high-quality development strategies to solve the debt default problem.
The marginal contributions of this paper are as follows. First, it extends research on private enterprises' debt problems. Most studies analyze private firms' debt problems from the perspective of banks (Brandt and Li, 2003), whereas this paper analyzes these problems from the perspective of firms' decision-making. Other studies focus on the liquidity risk and monitoring effects of SFLI (Diamond, 2004; Bharath et al., 2008), whereas this paper analyzes how SFLI affects private firms' debt default. Finally, the paper adds evidence to firm diversification and supports the value discount of diversification (e.g. Rajan et al., 2000) by investigating private enterprises' debt default.
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Received: 09 March 2020
Published: 25 April 2022
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