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Capital structures in an emerging market: a duration analysis of the time interval between IPO and SEO in China

We model the durations between firms’ ‘Initial Public Offerings’ (IPOs) and their subsequent ‘Seasoned Equity Offerings’ (SEOs) in China between 2001 and 2006. Our results have important implications for the capital structure in emerging markets. Our evidence on financing decisions in China contradicts the predictions of both the trade-off and pecking order theories. Firms do not issue equity after debt financing to offset the deviation from the target leverage ratio. Profitability is negatively related to debt ratios. Limited access to the corporate bond market and the privilege of the low effective tax rate that local governments give to firms have increased the cost of debt and decreased the benefit of debt, and make firms in China under-utilize the tax shield of debt. Surprisingly, profitability is positively related to the conditional probability of equity financing, and market timing is an important consideration when Chinese firms undertake equity financing.