Short Debt Maturity and Corporate Investment: New Evidence from Chinese Listed Firms

ABSTRACT

Using a dataset on Chinese listed firms, we study the impact of short debt maturity on capital expenditures. In contrast to the empirical findings from most of the previous works that rely on the US firm-level datasets, our results show that firms invest less rather than invest more when they have relatively shorter debt maturity. We argue that in an economy where short-term bank loans are the major financing resource, such as that of China, firms with shorter debt maturity tend to suffer more from potential rollover risks and hence are more likely to reduce their near future capital expenditures. Such an overhang effect generated by short-term debt becomes stronger when firms present worse financial health, as rollover risks are likely to be more serious when firms’ assets-in-place deteriorate.

KEYWORDS:

• Capital structure
• corporate investment
• debt maturity
• debt overhang

JEL:

• G32
• G31
• G3

Acknowledgments

We thank the editor and the anonymous reviewers for their insightful comments and suggestions

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Other conventional ideas, that is, owner-manager conflicts and signaling requirements, should offer less explanatory power (Cai, Fairchild, and Guney 2008). Some characteristics of the corporate governance system in China, such as high ownership concentration and government-nominated management, indicate that managers of CLFs have weak incentives to work against shareholders (Jiang and Kim 2015). Therefore, shareholders may have less incentive to discipline managers’ behavior by using more short-term debt to reduce free cash flow to force the firm to periodically repay principals. Furthermore, to bypass information problems, most bank loans in China are backed by collateral, and the only type of collateral acceptable to many banks is land or buildings (Cull and Xu 2005). Therefore, a shorter maturity structure per se may not be treated as a signaling tool for CLFs to convey their qualities to banks.

2. Our major indicator is time invariant, and it is constructed by using a method similar to that utilized by Guariglia (1999). Additionally, Lemmon, Roberts, and Zender (2008) show that financial variables are time persistent.

3. Although the stimulus plan helped to bolster the slumping Chinese economy, it caused some unintended consequences that may have damaged long-term economic growth, such as shadow banking (Chen et al. 2017) and deeper credit misallocation (Cong et al. 2017).

4. We use tangibility as an instrument for leverage (Firth et al. 2008). We use asset maturity together with the current assets ratio as instruments for SDM (Gopalan et al. 2014). All instruments are lagged one to two years.

5. Jiang (2017) provides more detailed study of this ‘implausibly large’ IV estimate in finance research.

Additional information

Funding

This research is supported by the Research Fund of Central China Normal University (CCNU18XJ003-1, CCNU19A03014), the Ministry of Education in China (MOE) Project of Humanities and Social Sciences (18YJC790166, 19YJC790159), and Digital Technology and Financial Engineering Discipline Construction Fund of Zhongnan University of Economics and Law (31712141201). All remaining errors are our own