Local government turnover and capital structure: evidence from China

Abstract

Purpose

The political influence on the determinants of capital structure has been under-researched for a long time. Taking the turnover of secretary of municipal committee as a political factor in China, this paper studies the effect of local government officials' turnover on firm's capital structure.

Design/methodology/approach

Starting with all A-shares listed firms in the Shanghai and Shenzhen Stock Exchanges from 2001 to 2018, this paper implements the OLS estimation, staggered difference-in-difference approach to investigate the effects of political turnover on the choice of capital structure.

Findings

The results show that, driven by government officials' turnover, firms will significantly reduce their leverage. When comparing between formal finance (bank loans) and informal finance (payables), the reduction of capital structure is mainly driven by banks, not by suppliers. Furthermore, two possible channels have been investigated. First, the reduction effects are mainly driven by the SOEs when classifying the types of corporate ownership into SOEs and non-SOEs. Second, the reduction effects exist in areas with the more intense government intervention when considering the heterogeneity of the development of institutional environment in provinces.

Originality/value

This paper first contributes to the literature on the determinants of corporate choice on capital structure. Second, this paper enriches the studies on the economic consequences of local government officials' turnover.

Citation

Liang, S., Xin, F., Yu, J. and Zhao, G. (2023), "Local government turnover and capital structure: evidence from China", Asian Review of Accounting, Vol. 31 No. 1, pp. 131-152. https://doi.org/10.1108/ARA-04-2022-0087