THE CAPITAL STRUCTURE DECISION FOR LISTED REAL ESTATE FIRMS: A STUDY OF GREATER CHINA

Abstract

The paper seeks to examine the effects of four specific determinants (size, tangibility, growth opportunities and profitability) on capital structure of 279 listed real estate firms in Greater China (China, Hong Kong and Taiwan) for a period of 2001-2011. Using a fixed effect model, the empirical results of the study show that for Greater China region: (1) Growth opportunities appear as an insignificant factor to the capital structure of a firm. (2) Both tangibility and size display a positive relationship with leverage ratio of a firm. (3) Profitability ratio is negatively correlated with the leverage ratio. There seems to be a good fit of Trade-off theory to predict the effect of four determinants on the leverage ratio of listed real estate firms in Greater China. Among the three nations, the effects of four determinants on the leverage ratio of China and Hong Kong’s firms seem to be similar in the full period analysis of 2001-2011, while Taiwan firms behave differently. However, the sub period analyses found a shift of similarity between China and Hong Kong firms to China and Taiwan firms from the earlier period 2001-2005 to the latter period 2006-2011. Firm size is identified as the most significant factor and positively correlated with the debt ratio for listed real estate firms across the three nations. The effects of other factors are found to be inconsistent across the nations in two sub periods of time.