Impacting Factors of the Chinese Military Enterprises’ Capital Structure and Approaches of Importing Private Capital

Abstract

This paper analyzes the impacting factors of the capital structure of military listed companies in China, based on the 2001–2015 panel data of 104 Chinese listed companies, and we explore practical approaches for Chinese private capital entering the military enterprises, given the strategy of the civil–military integration. We show that: (1) state-owned shares and domestic legal person shares negatively impact the capital structure of military enterprises and mainly show in non-current liability. While the foreign legal person shares and the shareholding ratio of executives and managers have no significant impact. (2) As for the financial indicators, coefficients of firm size, asset tangibility, and growth are positive, while those of profitability, non-debt tax shield, and growth opportunity are negative. (3) Given the civil–military integration strategy, equity financing imposes a negative impact on the capital structure of military enterprises. The negative impact increases, with the increase in military enterprises’ profitability, business risk, and growth opportunities, and with the decrease in military enterprises’ growth and firm size. (4) The negative impacts of equity financing are significant, if debt ratios of the military enterprises are too small or too large. While the state-owned shares only have significant negative impact on military enterprises whose debt ratios are too small. As a conclusion, we suggest private capital to prioritize the corporate bonds or short-term borrowing to enter the military industry, and choose smaller or medium-sized military enterprises with more growth opportunities and lower business risks.

Keywords:

• Civil–military integration
• private capital
• financial indicators
• military enterprise
• capital structure

JEL Classification:

• C51
• G30
• Z00

Notes

1. From website: http://www.miit.gov.cn/n1146285/n1146352/n3054355/n3057613/n3057620/c3573624/content.html.

2. From website: http://www.mod.gov.cn/policy/2015-01/07/content_4562869.htm

3. From website: http://www.scio.gov.cn/32344/32345/33969/34577/xgzc34583/Document/1478256/1478256.htm.

4. Debt ratio greater than 1 has 10 sample values, operating income is less than 0 has a sample value, compared to 1232 observations, which only a small part of the sample, in fact, there is no significant effect on regression results if we don’t delete these samples.

5. According to Guo and Sun (2003), Huang (2006); Sun and Shi (2015), individual effects have significant influence on the enterprise's capital structure, so this paper adopted a two-way fixed effect estimate in the column (5).

6. At the 17th Congress of China in 2007, civil–military integration strategy was put forward for the first time.

7. The national defense board is composed of the list companies with high importance and large-scale of the military business. The national defense-related board is composed of the small and medium companies whose business is related to military production, but the importance and scale is lower.