Interest rate regulation, earnings transparency and capital structure: evidence from China

We use samples from Chinese listed companies to investigate the effects of interest rate deregulation and earnings transparency on company’s capital structure in China over the period of 2003-2015. In particular, we study the link between state-owned enterprises (SOEs), economic growth targets, and marketization in China's unique institutional context. The results show earnings transparency increases firm leverage and the additional tests suggest that such an effect takes place via a mechanism by reducing the cost of debt finance. However, information transparency could moderate the effects of interest rate deregulation on corporate capital structure. In addition, SOEs are less sensitive towards the changes of interest rates in China because lending to SOEs is policy-oriented and lacks of market evaluation of business risk. Government control is conducive to enhancing the transparency of the whole industry, however, market-oriented reform is conducive to enhancing the transparency of the company's own information. The results are robust to endogeneity tests and a variety of variable and model specifications. Lastly, we find that information transparency has little impact on equity financing because of IPO and SEO strictly controlled by the Chinese government. The paper makes contribution to the relationship between earnings disclosure quality and capital structure in the Chinese unique institutional context, such as taking the progressive interest rate reform, SOES, different economic growth target and different marketization level in each province of China. We suggest that investors will pay more attention to the company's own unique information transparency in the provinces with high degree of marketization. As a potential direction for future research, we will investigate how the earnings transparency has impact on capital structure, and how such impact would depend on the transparency of specific business, the cap of foreign shareholding and the convenience of investment