Stock Seasoning and the Dynamics of Corporate Leverage
This paper examines the evolution of capital structure for Chinese stock issuers over an eleven-year period, comprising three years pre- to eight years post-IPO. This topic is of special interest given the dominance of state-controlled lenders, and the emergence of large numbers of private (i.e., non-state) Chinese issuers. While sample firms experience marked declines in leverage on listing, rates quickly rebound within three to four years. Findings support Alti’s (2006) evidence of target rates, rather than Baker and Wurgler’s (2002) account of capital structure as an analog of past financing events. More importantly, IPO firms rebalance debt from short- to long-term sources over the seasoning period. Additionally, strong negative associations exist between short-term leverage and dividend payout rates during both pre- and post-IPO periods. Greater short-term debt also constrains issuers’ Q and underpricing levels, as well as the possibility of a vendor sale at IPO.
Board independence, duality and gender diversity exert little influence on issuer indebtedness. However, lower rates of pre-IPO leverage are evident in firms with older boards (and/or older CEOs). Such firms experience smaller falls in leverage in the year of listing, as well as reduced upswings post-IPO. Results are consistent with older board firms possessing fewer growth options and raising less capital at IPO.
Finally, this study assesses whether IPO firms sell appreciably more equity and at higher pricing multiples during hot-markets (Alti, 2006; Guney and Iqbal-Hussain, 2010; and Dudley and James, 2018). Larger drops in leverage are not generally apparent for such issuers.
Dr Chau Chak Wing Building
