THE IMPACT OF DETERMINANTS OF LEVERAGE RATIO ON STOCK MARKET RETURNS: AN EMPIRICAL STUDY ON PUBLICLY LISTED REAL ESTATE COMPANIES IN GREATER CHINA

Abstract

This paper seeks to examine the effects of the determinants of capital structure on market returns. In other words, it seeks to determine how tangibility, profitability, growth opportunity and size affect market returns. At the same time, it studies the impact of the leverage factors on leverage ratio. The study is conducted on 167 firms in Greater China, which consist of 73 firms in China, 76 firms in Hong Kong and 18 firms in Taiwan, over a period of 10 years from 2005 to 2014. Sub period analysis: 2005 to 2009 and 2010 to 2014 was also conducted. The empirical results of this study is determined using a fixed effect panel regression model followed by a structural equation model that was utilized to take the endogenous effect of leverage ratio and stock returns into consideration, Results from the regression illustrates a significantly positive results between market leverage and stock returns. However, this relationship is significantly negative in China, Hong Kong and Taiwan. From the empirical results derived from the structural equation model, profitability and growth opportunity has a significantly positive impact on stock market returns in all three regions. Additionally, tangibility has a significantly positive relationship with market returns in Hong Kong and Taiwan but not in China and the Greater China region. Lastly, size does not have any association with market returns. Results from the sub period analysis indicate that there are hardly any changes between both sub periods, as their relationship with market returns remained the unchanged. Only China experienced a change in relationship for growth opportunity and profitability from positive in 2005-2009 to negative in 2010-2014. However, the negative relationship in the second sub period is insignificant. Regarding the factors of leverage, the study concludes that there is a negative impact of tangibility, growth opportunity and profitability on leverage ratio whereas size has no association with leverage ratio.