China is an important counterexample to the findings in the law, institutions, finance, and growth literature: neither its legal nor financial system is well developed by existing standards, yet it has one of the fastest growing economies. We examine 3 sectors of the economy: the State Sector (state-owned firms), the Listed Sector (publicly listed firms), and the Private Sector (all other firms with various types of private and local government ownership). The law-finance-growth nexus established by existing literature applies to the State and Listed Sectors: with poor legal protections of minority and outside investors, external markets are weak, and the growth of these firms is slow or negative. However, with arguably poorer applicable legal and financial mechanisms, the Private Sector grows much faster than the State and Listed Sectors, and provides most of the economy's growth. This suggests that there exist effective alternative financing channels and governance mechanisms, such as those based on reputation and relationships, to support this growth.

Law, Finance, and Economic Growth in China

https://finance.wharton.upenn.edu/~allenf/download/Vita/finlaw-china-122402.pdf

Law, finance, and economic growth in China

When firms adjust their capital structures, they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt. In contrast to previous empirical work, out tests explicitly account for the fact that firms may face impediments to movements toward their target ratio, and that the target ratio may change over time as the firm's profitability and stock price change. A separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision.

The debt-equity choice

Financing patterns around the world: Are small firms different?

Purpose – This paper seeks to investigate the relationship between capital structure and profitability of listed firms on the Ghana Stock Exchange (GSE) during a five‐year period.Design/methodology/approach – Regression analysis is used in the estimation of functions relating the return on equity (ROE) with measures of capital structure.Findings – The results reveal a significantly positive relation between the ratio of short‐term debt to total assets and ROE. However, a negative relationship between the ratio of long‐term debt to total assets and ROE was found. With regard to the relationship between total debt and return rates, the results show a significantly positive association between the ratio of total debt to total assets and return on equity.Originality/value – The research suggests that profitable firms depend more on debt as their main financing option. In the Ghanaian case, a high proportion (85 percent) of the debt is represented in short‐term debt.

The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana

This study uses a new date set to assess whether capital structure theory is portable across countries with different institutional framework. We analyze capital structure choices of firms in 10 developing countries, and provide evidence that these decisions are affected by the same variables as in developed countries.

V.A. Asli Demirgu-Kunt

Papers

Capital Structure in Developing Countries

Capital Structure in Developing Countries