Lim (2012) conducted a research study to investigate the determinants of capital structure of financial services in China. Using a relative regression of accounting data for A- share financial listed companies over the years 2005-2009 an empirical study was conducted. In this study, the results showed that profitability, firm size, non-debt tax shields, earnings volatility and non- circulating shares are significant influence factors in financial sector. The China stock market
DETERMINANTS OF CAPITAL STRUCTURE16and Accounting research database were used as the main data source in the study. Since the corporations in financial and non- financial industry have different capital structure and due to few empirical studies of financial sector, the study takes all Chinese listed companies in the financial industry as samples. It includes firms such as banks, insurance and investment companies. All the data were based for the period of five years. Using the method of multiple linear regressions, all independent variables were entered into the regression simultaneously. To verify the accuracy of the result, two approaches were used ie. Model 1 and model 2. Model 1 was used to test the relationship between total leverage and 7 different variables i.e. profitability, asset tangibility, firm size, non-debt tax shields, growth opportunities, earnings volatility and non- circulating shares. ANOVA was used to determine whether there is linear relationship between financial leverage and the independent variables. Model 2 focused on the long-term leverage with the same independent variables as in model 1. The findings of the study showed that leverage ratio increased with firm size and decreased with profitability, non-debt tax shields, earnings volatility and non-circulating shares. China still transforming form a command to a market based economy, the determinants of capital structure found in developed countries also had influence on the Chinese companies. The most significant institutional characteristic in China was the state controlling ownership since most of the listed companies are still controlled by the state. Chinas incomplete and immature institutional structure does have an effect on firms leverage decision. The result of the study also implied that the trade-off theory has limited robustexplanatory power for Chinese listed companies. The financial listed companies in China seemedto follow a different pecking order that external financing is preferred than internal sources, which means that debt financing is the priority. This study had not considered the
DETERMINANTS OF CAPITAL STRUCTURE17macroeconomic factors that may affect leverage and also lacked thorough analysis of Chinas institutional environment and corporate governance structure.