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2274Credit supply shock is an important source of macroeconomic fluctuations. If credit supply shock significantly affects firm capital structure, the leverage change will play a role in amplifying or smoothing fluctuations by changing entrepreneurs’ net worth and agency costs. Therefore, examining the impact of credit supply on capital structure will help to further understand what role leverage will play in the process of interactions between financial frictions and economic activities, and whether this mechanism will lead to a structural effect in the context of China.
Intuitively, an exogenous credit supply shock will, on the one hand, have a positive impact on leverage by firms’ access to financing（liability side）, but on the other hand, also have a negative impact on the capital structure by firms’ accumulation of profits（equity side）. For this reason, we are likely to observe a heterogenous pattern in the impact of credit supply on capital structure at different times and in different regions.
China’s deleveraging policy can be seen as an exogenous shock to credit supply. Using the quarterly data of China’s listed companies from 2012 to 2018, this paper examines the impact of credit supply on capital structure empirically by using the credit supply shock resulting from the deleveraging policy. The results show that the leverage of state-owned firms decreases with the credit supply contraction since 2017Q2, relative to that of their private counterpart, a striking reversal of previous trend of leverage increase of state-owned firms since 2008. Further mechanism analysis shows that under the credit supply shock, the difference between state-owned firms and non-state-owned firms mainly lies in the growth rate of equity rather than that of equity: On the one hand, the financing costs and financing constraints of non-state-owned firms have risen with a significant erosion of profitability, which leads to a larger decline in equity growth（compared to debt growth）and a passive increase in the leverage of non-state-owned firms; on the other hand, the financing costs and profitability of state-owned firms have not deteriorated significantly, which contributes to a modest reduction of their leverage induced from a decrease in debt growth. The robustness test shows that although the overcapacity policy mainly implemented at the industry level has achieved an overall decrease in the leverage ratio of firms in overcapacity industries through supply contraction and profit transfer between industries, it cannot explain the structural reduction of state-owned firms’ leverage within the industry. Seasoned equity offering（SEO）cannot explain the structural change in the capital structure of firms with different ownerships. The conclusions confirm the heterogeneous impact of financial frictions on economic activity, analyze the impact of supply-side factors on capital structure, and supplement the literature on shadow banking.
