Question Betty Finance & Economics

What is the capital structure of Chinese listed companies in the IT industry?

What is the capital structure of Chinese listed companies in the IT industry?

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Answer Expert #27044

The IT industry in China has been progressively developing in recent years, as this has prompted many companies in the sector to find reliable solutions to enhance their capital structure. Different factors may affect organisations’ capital structure, such as R&D intensity, stock returns, asset tangibility and profitability dimensions (Liu and Ren, 2009). Yet, it has been illustrated that a substantial part of the research on this topic is related to the situation in developed countries, thereby there should be more comprehensive details about the transition experienced by developing economies such as China. Research indicates that the leverage in Chinese IT companies tend to increase with firm size and fixed assets (Chen, 2004). Understanding the precise way in which Chinese IT organisations finance their operations is important in making certain conclusions about their future performance.

It can be argued that large companies operating in the Chinese IT industry obviously have easier access to various bond markets, implying their focus on strengthening their capital structure over time. However, it can be illustrated that the profitability and capital structure of those firms have a negative correlation. Unlike new equity issuance, retained profit emerges as the most appropriate and reliable source of finance for the majority of Chinese IT companies (Liu and Ren, 2009). In this way, it has been pointed out that retained profit is an essential method to raise additional capital as part of the overall objective to improve organisations’ capital structure. Senior managers working at Chinese IT listed companies have demonstrated their opinion that equity financing plays an important role in expanding the dimensions of profitability to Chinese IT organisations (Brealy and Myers, 2003). Moreover, the indebted financing is rather high, especially when equity capital is considered low.

References

Brealy, R. A. Myers, S. C. (2003). Principles of Corporate Finance. New York: McGraw-Hill.

Chen, J. (2004). Determinants of capital structure of Chinese-listed companies. Journal of Business Research. 57(1) 1341-1351.

Liu, Y. Ren, J. (2009). An empirical analysis on the capital structure of Chinese listed IT companies. International Journal of Business and Management. 4(8) 46-51.