Thesis

Corporate investment, capital structure and (reversed) debt overhang: a comparative analysis of Chinese, U.S., and global markets

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Awarding institution
  • University of Strathclyde
Date of award
  • 2024
Thesis identifier
  • T17055
Person Identifier (Local)
  • 201964719
Qualification Level
Qualification Name
Department, School or Faculty
Abstract
  • This thesis primarily focuses on examining capital structure and the concept of (reversed) debt overhang. In Chapter 2, we delve into an analysis of financial data from Chinese listed companies from 2000 to 2018. This investigation assesses the relevance of the pecking order theory and begins a preliminary exploration into the impact of debt overhang on future investments. Our findings challenge the traditional pecking order theory for Chinese firms, highlighting their preference to treat long-term debt as a financing method of last resort. Significantly, short-term debt comprises a major portion of their debt structure and negatively influences future investments. While long-term debt generally shows little effect on future investments in Chinese companies, it exhibits a notable negative impact when future investments are measured using the net investment ratio. Our research also does not establish a significant link between intangible assets and leverage levels. Chapter 3 explores the relationship between future investment levels and debt structure choices in U.S. listed companies, excluding sectors like finance, banking, insurance, utilities, and government. We employ a cross-sectional model to evaluate predictors of future investment levels, such as Tobin's q, cash flow, and ROE. Our analysis reveals a positive and significant influence of these factors on debt structure decisions, especially regarding short-term debt. However, we observe no significant impact on long-term debt issuance. The study also distinguishes between expansion and recession periods, noting the positive influence of expected investment factors on debt issuance during expansions, with a reversal of this trend during recessions. Additionally, a firm's growth factor has a negative effect on debt issuance during expansion periods but a positive effect during recessions. Chapter 4 focus on the complex interplay between debt overhang, expected investment, and liquidity, crucial elements in defining a firm's financial health and strategic decision-making. The chapter examines how existing debt, or debt overhang, can impede a firm's ability to initiate new projects or obtain further funding, particularly under financial stress. Utilizing Compustat fundamental annual data from North American (referred to as US-listed in this study) and Global listed firms from 1987 to 2022, the research introduces an innovative approach. It proposes the creation of a q-factor based on liquidity indicators to assess expected investment levels and their effect on short-term and long-term debt overhang. For US-listed firms, the results show that liquidity positively influences capital expenditure in both short and long terms. In contrast, for Global firms, liquidity adversely affects short-term investment but positively impacts long-term investment. In terms of expected investment, for US-listed firms, it negatively impacts short-term debt but positively influences long-term debt. However, for Global firms, no significant effect on debt overhang is observed.
Advisor / supervisor
  • Zhang, Hai
Resource Type
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