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| Industrial Policy and the Speed of Leverage Adjustment |
| WU Cen, LI Wenfei, TANG Qingquan
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School of Management, Jinan University;
School of Economics and Statistics, Guangzhou University;
Business School, Sun Yat-sen University |
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Abstract Recently, the dynamic adjustment of leverage has become a popular research topic. Theorists point out that each company has a target value of leverage, and lower or higher levels damage firm value. Therefore, when leverage deviates from the target value, the company has an incentive to adjust it towards the target value. However, due to the incompleteness of the market, many factors prevent companies from freely adjusting their leverage. This is especially pronounced in China, where high financing costs and a lack of financing opportunities delay leverage adjustment. Research has shown that a company's external financing environment has an important impact on the speed of leverage adjustment. Although industrial policy is considered an important institutional factor affecting a company's financing environment, we know of no research on whether and how industrial policy affects the speed of leverage adjustment, which provides us with a research opportunity.
As an important institutional background in China, industrial policy has a significant impact on the external financing environment of companies through direct intervention and indirect guidance, and may thus affect the speed of leverage adjustment. Direct intervention mainly includes technological control, environmental protection control, directory guidance, market access control, project approval control, etc., while indirect guidance includes fiscal subsidies, tax incentives, and financial policies aimed at ensuring the implementation of industrial policy. In terms of debt financing, industrial policies enable selected companies to be favored by banks and to be related with higher mortgage expectations, resulting in more loans and faster upward leverage adjustment. In terms of equity financing, industrial policies provide selected companies with more financing opportunities via SEO, etc.,which speeds up downward leverage adjustments. However, because the debt financing channel is dominant among Chinese listed companies, the main impact of industrial policies is likely to be faster upward leverage adjustment.
Drawing on a sample of Chinese A-share listed companies from 2006 to 2015, this article explores the influence of industrial policy on the speed of leverage adjustment during the eleventh and the twelfth five-year plans. Industrial policies are identified through policy documents and relevant literature and firm-level financial data is obtained from the CSMAR database. The empirical results reveal that support from industrial policies is associated with faster adjustment, and the effect is more pronounced in non-SOEs, smaller firms, and firms under more serious financial constraints. After separating the two adjustment directions, we show that being supported by industrial policies helps firms speed up upward adjustment and also helps firms with fewer fixed assets speed up downward adjustment. This article also indicates that debt financing is the main channel through which industrial policy affects the speed of leverage adjustment, and support from key industrial policies can affect how certain kind of firms adjust leverage via equity financing. Our results suggest that equity financing is still relatively costly compared with debt financing, and that companies still face many restrictions when attempting to obtain it.
This study contributes to the literature on industrial policy and leverage adjustment. It also provides direct empirical results on the channels of influence, enriching our perspective when evaluating the economic consequences of industrial policy. This study also has important policy implications. Considering the costs of capital market financing, providing companies with convenient debt financing channels can speed up leverage adjustment. We should also further improve the efficiency of the capital market, remove unnecessary policy barriers, reduce the transaction costs of equity financing, and provide more flexible ways for companies to quickly adjust their leverage. Future studies could focus on the impact of stock market reforms on the speed of leverage adjustment.
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Published: 29 April 2019
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