Capital Structure of US and Chinese Companies Essay Example Pdf

The sudden break of the 2008 financial crisis is the first world level crisis of financial markets. A host of countries have suffered from this disaster. Throughout the world, many large banks have seen most of their equity destroyed by the crisis that started in the U.S. subprime sector in 2007 and governments have had to infuse capital in banks in many countries to prevent further outright failure. Was the poor performance of the banks contribute to the outcome of a financial Tsunami that hit them unexpectedly, or were some banks more predisposed to experience large losses? Poor corporate governance of banks has increasingly been acknowledged as an important cause of this financial crisis. Because the U.S. And China banks were facing different capital market mechanism, tax system, agency problems and different forms of ownership, the China banks experienced different distressed financial conditions that U.S. Banks faced during the 2008 financial crisis. In this study we analyze the importance of country-specific factors in the leverage choice of banks from the U.S. as compare to China. The purpose of this paper is to investigate, from a comparative perspective, the nature and significance of country-specific factors as determinants of corporate financial leverage. Our analysis yields a new result: Although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage.

Section I: Introduction

A generally accepted definition of capital structure has not yet been evolved. Traditional concepts describe capital structure as various financing tools or different types of financing source and its proportion. If the value of a firm is defined to be the sum of the value of the firm's debt and the firm's equity, then capital structure can be defined as the ratio of debt-to-equity. If the goal of the management of the firm is to make the firm as valuable as possible, the firm should pick the debt-equity ratio that makes the pie as big as possible. A much broader definition of capital structure encompasses a corporate's ability to service its debts, refinancing ability and future profitability. Capital structure is one of the basic issues of theoretical research on corporate finance. The capital structure is the key problem in the enterprise theory and the practice of corporate governance. The earliest research on capital structure is studied as pure corporate financial decision-making problemA¼Å’began in the 1950s, which was mainly about the relationship between capital cost and corporate value as well as the relationship between the cost of capital .In 1952,David Durant systematically summarized the traditional capital structure of various theories. Since the Modigliani-Miller theorem came forth in the 1950's, which forms the basis for modern thinking on capital structure,the research on financing decision theory has made a great progress with a mass of literature. With respect to the theoretical studies, there are two widely acknowledged research orientations: one is the mainstream theory, which studied the capital structure and corporate value relations; the second is the capital structure determinants school, which referred to factors influencing the capital structure. Following Modigliani and Miller's seminal work (hereafter, M&M model), significant theoretical progress has been made in terms of corporate capital structure and financial economics. A lot of studies show that capital structure is determined by a combination of factors that are related to the characteristics of the firm as well as to their institutional environment. Although most studies focus on the importance of firm characteristics by examining corporate financing choices within individual countries, a growing literature that compare differences in the capital structure between countries started to appear during the last decade (e.g., Demirgüç-Kunt and Maksimovic, Booth and Maksimovic, et al. which finds that a firm's capital structure is not only influenced by firm-specific factors but also by country-specific factors. These researchers conducted numerous empirical analyses; however, these were mainly based on the data of developed countries, such as the United States, the United Kingdom, Japan, Germany, France, and Canada. For countries like China where the role of the state is still pervasive, corporate governance development has to take political parameters into account, a phenomenon described by Lin (2000) as the duality of corporate and political governance. Listed companies in China show a totally opposite financing structure with the modern capital structure theory as a whole. The Chinese traditional political, societal and cultural contexts have recognized the norm of authoritarian management style and heavy dependence on coordination and integration by insiders. This has led to serious information asymmetry and lack of disclosure transparency. On the other hand, compared with the financial systems in developed countries, the Chinese financial markets and institutions are not yet mature due to our short history, so there is an urgency to investigate the financing patterns and the capital structure in China. Specifically, to confirm the finding of De Jong, et al. which reported there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage, this paper examines the debt asset ratio of US companies and compare it to its Chinese counter part. The rest of this paper is organized as follows. The next section provides background discussion and hypotheses formulation. Section III presents a literature review about the capital structure. Section IV elaborates on the research methodology, including data collection, definition of variables, and model specification. Empirical results and analysis are presented in Section V. Section VI concludes this study.

Section II: Background discussion

1) The 2008 financial crisis The financial crisis began in the U.S. during the second half of 2006 with a sharp increase in U.S. Bank losses due to subprime mortgage foreclosures. The financial crisis had its origins in the subprime lending of the housing market, but rapidly spread to every other segment of the credit markets. The US financial market and real estate market were shocked seriously due to the bankrupt of the subprime mortgage lenders, and this significant negative effect spread out to European market, Japan market, and other main global financial market in August, 2008. Due to this severe financial crisis, some worldwide banking giants were hit really hard. For example, share prices of Citigroup and the Royal Bank of Scotland tumbled by more than 95% from 2007 to January 2009. As an important part of the world economy, China was also affected by the financial crisis. The influence can be found easily from the import and export. The amount of import and export of China began to drop significantly since Oct. 2008, which is obvious due to the global financial crisis. However, the banking system in China did not receive such a great impact. According to statistics, the bad debt ratio in China still keeps at a low level about 2.45% at the end of the year 2008. The total value of banks in China has already been the largest in the world, even though their market value suffered an incredible shrinkage. 2) The situation of Chinese banking system After the beginning of the financial turbulences in summer 2007, the issue of banks' corporate governance, with the notable exception of remuneration, went out of focus for some time. As a vitally important of the financial system, banking system cannot exempt from the seriously negative effect. Poor corporate governance of banks has increasingly been acknowledged as an important cause of the financial crisis. Listed banks and even non-listed banks worldwide have publicly emphasized that good corporate governance is of vital concern for the company. Numerous reports, documents and statements published in 2008 calling for reform of the banking system came out. The banking system in China has evolved from a monopolistic state agent to one with more than a hundred commercial banks, urban cooperatives and financial institutions coexisting in the market. Unlike the U.S. , banks in China used to serve as government policy lending agencies, providing funds to state-owned enterprises and taking deposits from private and public savers. Encumbered with non-performing loans, their profitability, productivity and asset quality remained quite low even after a series of banking reforms. However, it is striking to note that China's largest commercial banks emerged to become the biggest winners as a result of the crisis thanks to reforms over the last 10 years. In 2008, three listed Chinese state-owned banks, Industry and Commercial Bank of China, Bank of China and China Construction Bank had replaced their American and European counterparts to be the world's three largest commercial banks in market value and profitability after they were listed on the stock exchanges only two years earlier. The most significant reform before the crisis was ownership diversification and optimization of capital structure, aiming to improve corporate governance and efficiency. China has different institutional structures from developed as well as many developing countries. Generally speaking, Chinese banking system have six striking features .The first one is the large size, which not only in relative terms but also in absolute ones. In terms of bank credit to the private sector as a percentage of GDP and in terms of bank credit in USD, China without any doubt ranks among the top. Furthermore, bank credit continuous to grow at a brisk rate, pushed by buoyant economic growth, despite the worldwide financial crisis. However, this does not imply a very developed banking system since penetration of banking products is low and bank credit for small and medium size enterprises and households is scarce. The second characteristic is that the Chinese banking system has been dominated by four very large state owned commercial banks. The competition in the banking system is not very strong, given the behavior of the four banks, the sustaining massive government intervention and the ample room for growth that the strong demand for credit has offered to all banks. During the financial crisis, the unprecedented large incentive package is the best evidence of this feature.( David Erkens,2009) The third feature is the rather peculiar structure of the balance sheet, compared to international standards. For example, loans are a large part of the assets, the majority of which are granted to the corporate sector and to a large-although decreasing-extent short term. A large amount of liabilities are deposits and retail depositors are the main financers of the banking system.(Zvi Griliches,2008) A fourth characteristic is very poor profitability. The return on average equity (ROE) of the banking system and the return on average assets (ROA) are lower compared to developed banking system.(González-Hermosillo,2006) The main reason for the low profitability seems to be assets quality because Chinese banks have a much lower non-interest income than that of the U.S. ones. The fifth characteristic of Chinese banks has been their very poor asset quality and low capitalization. The ratio of non-performing loans is relatively higher compared to developed banking systems, like the U.S. The underlying reasons for such poor asset quality are soft-budget constrains for the lending to state owned enterprises but also a weak credit culture. The last characteristic is the poor institutional framework of the banking system. This is featured by a rather loose regulation and supervision, particularly as regards enforcement. Furthermore, the regulatory bodies, as well as the central bank, are dependent on the government's decision. The lack of enforcement power from the supervisory part helps explain the very limited improvement in corporate governance. Additional weaknesses are the lack of a bankruptcy law, a national credit bureau and a smooth functioning of the payment systems. In China, government intervention is a necessary part of the overall economy and an effective way to face with the special periods. Instead of using the tight monetary policy before, the government carried out a loose monetary policy with lower required reserve ration to motivate the issuance of new loans, thus simulate the spending activity and the market liquidity, and furthermore simulate overall economy performance towards the financial crisis. Changing the interest rate on deposit and loans is another way to simulate the spending activity, which did help quite a lot to Chinese banks. Because the U.S. And China banks were using a different business model, the China banks experienced different distressed financial conditions that U.S. Banks faced. In this paper we compare U.S. leverage levels to that of China to determine whether the capital structure does influence banks during the last financial crisis. We will take 20 banks from China and U.S. respectively for the period between 2007~2009 as examples.

Section III: Literature Review

Empirical literature has discovered many facts regarding capital structure consistent with traditional theories. Titman and Wessels(1988) found that short-term debt ratios were shown to be related to "uniqueness" of a firm's line of business, transaction costs, firm size, past profitability and market value of equity. While most of the evidence was obtained from U.S. data, capital structure theories have been tested in other economies environments either as a robustness test or as an attempt to clarify observed capital structure irregularities. An early investigation of differences in the distributions of capitalization ratios for U.S. and Japanese manufacturers was performed by Michel and Shaked(1985) . They obtain a result that Japanese manufacturing was more highly leveraged than U.S. Manufacturing by using nonparametric tests. Kester (1986) used a large sample of manufacturing corporations to analyze Japanese corporate capital and ownership structures and compares them to those of U.S. corporations. Specifically, it tested the hypothesis that Japanese manufacturing was more highly leveraged than U.S. manufacturing and attempts to explain the observed results. The results indicated that when leverage was measured on a market value basis and adjusted for liquid assets, there were no significant country differences in leverage between the United States and Japan beyond that which can be explained by variance in such factors as growth, profitability, size, risk and industry classification. When leverage was measured on a book value basis, significantly higher leverage was found in Japan even after controlling for such factors. Kester's(1986) study differed from Michel and Shaked's(1985) in its use of a larger sample and several different measures of leverage that adjust for cash and near-cash. It also attempted to isolate a pure country effect by controlling for firm specific characteristics likely to explain some of the variance in leverage within the sample. Rajan and Zingales(1995) performed an early investigation of seven advanced industrialized countries (G-7: including the United States, Britain, France, German ,Italy, Canada and Japan)in 1995. They investigated the determinants of capital structure choice by analysing the financing decisions of public firms in the major industrialized countries, which showed that firm leverage was fairly similar across the G-7 countries at an aggregate level. They argued that although common firm-specific factors significantly influenced the capital structure of firms across countries, several country-specific factors also play an important role. They also performed a deeper examination of the major institutional differences across countries and their likely impacted on financing decisions. Finally, they computed the within-country partial correlations between leverage and the factors identified as important, which suggests that the theoretical underpinnings of the observed correlations are still largely unresolved. Wald (1999) examined the factors correlated with capital structure in the United States, Japan, United Kingdom, France, and Germany. Although both mean leverage and many firm factors appeard to be similar across countries, some significant differences remain. Specifically, differences appear in the correlation between long-term debt/asset ratios and the firms' risks, profitability, growth and size. These correlations may be explained by differences in tax policies and agency problems, including differences in bankruptcy costs, information asymmetries, and shareholder/creditor conflicts. His findings suggested links between varying choices in capital structure across countries and legal and institutional differences. Demirguc-Kunt and Maksimovic(1999) examined the maturity of liabilities in firms in thirty developed and developing countries between 1980 and 1991. They found systematic differences in the use of long-term debt between developed and developing countries, and between small and large firms. They attempted to explain the observed cross-country leverage and maturity variations by differences in their legal systems, financial institutions, government subsidy levels, firm characteristics, and in macroeconomic factors, such as the inflation rate and the economy's growth rate. They provided evidence confirming that firms in developing countries have less long-term debt, even after accounting for their characteristics. This lack of term finance was mainly owing to institutional differences, such as the extent of government subsidies, the different level of development for stock markets and banks, and the differences in the underlying legal infrastructure. Their finding also indicated that while policies that help develop legal and financial infrastructure were effective in increasing firm access to long-term debt, different policies would be necessary to lengthen the debt maturity of large and small firms. Improvements in legal efficacy seem to benefit all firms, although this result was much less significant for the smallest firms, which have limited access to the legal system. Similarly, policies that would help improve the functioning and liquidity of stock markets, would also mostly benefit large firms. In contrast, policies that would lead to improvements in the development of the banking system would improve the access of smaller firms to long-term credit. Booth et al. (2001) used a new data set to assess whether capital structure theory was portable across countries with different institutional structures. They analyzed capital structure choices of firms in 10 developing countries, and provided evidence that these decisions were affected by the same variables as in developed countries. However, there were persistent differences across countries, indicating that specific country factors are at work. Their findings suggested that although some of the insights from modern finance theory were portable across countries, much remained to be done to understand the impact of different institutional features on capital structure choices. De Jong, Nguyen, and Kabir(2008) analyzed the importance of firm-specific and country-specific factors in the leverage choice firms from 42 countries around the world. Their analysis yielded two new results. First, they found that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of these determinants. Second, they reported there was an indirect impact because country-specific factors also influenced the roles of firm-specific determinants of leverage. Joseph, Sheridan, and Garry (2006) examined the influence of institutional environment on capital structure and debt maturity choices by examining a cross-section of firms in thirty-nine developed and developing countries. They found that a country's legal and tax system; the preferences of capital suppliers and the level of corruption explained a significant portion of the variation in leverage and debt maturity ratios. They also found that firms tend to use more debt in countries where there was a greater tax gain from leverage, while firms in countries with larger government bond markets have lower leverage. However, they did not find a significant association between financing choices and the size of the insurance industry. As for the relevant research on capital structure issues in China, there were two main directions: one was to study the factors of influencing the capital structure; the other was to analyze relationship between corporate capital structure and business performance. Empirical studies about capital structure in China have made certain achievements. Corporate financing choices were determined by a combination of factors that were related to the characteristics of the firm as well as to their institutional environment. Although most studies focused on the importance of firm characteristics by examining corporate financing choices within individual countries, there was a growing literature that considers how institutional differences affect these choices. With regard to the factors influencing capital structure, researchers theoretically and empirically analyzed listed firms in China from the viewpoints of macroeconomics, variety of characteristics of corporate management, and corporate governance. However, the results of these analyses were not in consensus. A remarkable feature of most existing studies on international capital structure is the implicit assumption that the impact of firm-specific factors on leverage was equal across countries . Differences in the impact of factors on firms' capital structure choices seem to be explained by different legal and institutional frameworks. China and the U.S., a developing country and a developed country, each facing different capital market mechanism, tax system, agency problems and different forms of ownership, whether capital structure in China was related to factors similar to those appearing to influence the capital structure of U.S. Banks? In this paper, it would give a more reliable analysis.

Section IV: Methodologies

1) Data Collection The objectives of this study is to confirm the finding of De Jong, Nguyen, and Kabir(2008) which reported there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage. This study encompasses 20 banks from China and U.S. respectively as examples. The recent two years' financial reports will be analyzed from 2007 to 2009. All types of firms-large and small-are included as long as a reasonable amount of data is available. These banks represent 5 largest, 5 middle high, 5 middle low and the low by market capitalization. Chinese banks' data for leverage and firm-specific variables are collected from CCER database, while the primary source of U.S. banks' data are collected from the website (https://www.fdic.gov/index.html),which contains financial data on banks from a wide ranges in over 50 countries. Our sample period covers the years 2007-2009. The selection of a time-period involves the happening of 2008 financial crisis. A host of countries including China and U.S. have suffered from this disaster. It hit all the stock markets in the world and all internationally operating banks. This study would compare banks leverage levels of China to that of the U.S. to investigate whether their capital structure is similar to the US counter part during the financial crisis of 2008. It would utilize a regression framework with several firm-specific explanatory variables to find a relatively large explanatory power of leverage regressions in both countries. We also make a detailed comparative analysis of the impact of various firm-specific factors. 2) Variables and Hypothesis An appropriate definition of financial leverage is provided by the ratio of debt (both short term and long term) to total assets. In order to calculate the leverage (LEV) ratio of a firm, we adopt the following widely-used measure: the book value of debt over book value of total assets. The firm-specific determinants of leverage we use are also selected from prior studies and are defined as follows. SIZE: Firm size is defined as the natural logarithm of total assets. ROA: We follow Titman and Wessels (1988) by defining profitability as the ratio of operating income before depreciation over total assets. TANG: Tangibility is defined as net fixed assets over book value of total assets. In the analysis of firm-specific determinants of leverage we test the conventional theoretical variables on capital structure choice of firms. They are firm size, profitability (ROA) and tangibility which are based on the issues of empirical study. We run firm-level regressions with leverage as the dependent variable and firm-specific factors as explanatory variables for each of the 2 countries in our data set as follows: LEV = AZA±o + AZA±1Aƒ-SIZEi + AZA±2Aƒ-ROAi+ AZA±3Aƒ-TANGi +AZAµi where i denotes a firm.

Section V: Empirical Results and Analysis

Table 1 presents mean and median values of leverage and other firm-specific factors between China and U.S. banks during 2007-2009. GROUP 2007 2008 2009 N Mean Std. Deviation Mean Std. Deviation Mean Std. Deviation SIZE CHINA 20 26.009094 2.7993733 26.055600 2.9302108 26.718819 2.5964096 U.S. 20 17.856137 1.9069901 17.926557 1.9758217 17.949208 1.9756728 TANG CHINA 20 .010297 .0071202 .012651 .0119612 .011316 .0106232 U.S. 20 .164487 .0923847 .157971 .0884987 -.010125 .0443464 ROA CHINA 20 .056167 .0690544 .024995 .0232719 .026518 .0248596 U.S. 20 .009530 .0068630 .005450 .0055120 .161171 .0919421 LEV CHINA 20 .845663 .1224946 .833293 .1446172 .860692 .1442316 U.S. 20 .888539 .0538429 .881914 .0656875 .874315 .0505082 Previous studies analyze leverage ratios across a limited number of countries for the period of 1980s and 1990s and tend to observe a lower leverage in emerging economies. As can be seen from the above columns of Table 1, we observe firm leverage is fairly similar in both countries at an average level. Generally speaking, China banks have lower leverage ratio level than U.S. Banks. Sample statistics in 2007 show that banks in China have a median leverage ratio of 84.57%, 4.29% less than that of the U.S. So it is in 2008 and 2009. In the theory of firm's capital structure and financing decisions, the Pecking Order Theory was developed by Stewart C. Myers and Nicolas Majluf [12] in 1984. It states that companies prioritize their sources of financing (from internal financing to equity) according to the Principle of least effort, or of least resistance, preferring to raise equity as a financing means of last resort. Hence, internal funds are used first, and when that is depleted, debt is issued, and when it is not sensible to issue any more debt, equity is issued. Taking an important place in new capital structure theory centered with asymmetry of information, pecking order theory gains support from relative foreign empirical researches. However, the Chinese market exhibits high information asymmetry, phenomenal growth, highly concentrated ownership, and a lack of external market for corporate control. Most companies in China depart from the pecking order theory, while prefer to choose share certificates to gather capital. This is because, firstly, dividends on common stock are arbitrary, that is, equity financing is not an enforced obligation that has to be repaid by firms. Secondly, the corporate bond market in China is not well developed. Thirdly, managers are risk -averse. As for the profitability (ROA) for the banking industry, we observe that China behaves better than the U.S., especially in 2007 and 2008. China suffered less on dimensions of the financial system level during the 2008 financial crisis. The most important reason is that the high level of restrictions of China's financial system, which lacks of systemic risk, helps to avoid the external transmission, and at the same time, that China's high savings rate provide for financial institutions to a stable, adequate source of funding that enables the financial institutions do not have to resort to high-risk, high-cost financing channels. When a financial crisis occurs, we would expect banks with more capital and more stable financing to perform better. We find that the scale of banking in China is larger than the U.S. banks with more capital in 2007and 2008 had higher returns during the crisis. Bank profitability in the USA was extremely high in the pre-crisis period, yet this did not prevent the current crisis. It has become clear that these profits were on shaky grounds and also that bank profits were not used to buttress banks' capital bases. Evidence also shows that banks with more tangible assets use less long-term debt. We can see that China has less tangible assets than the U.S. Higher tangibility of assets often indicates lower risk for the lender as well as reduced direct costs of bankruptcy. During the 2008 financial crisis, the American Banks go bankrupt one after another, while banks in China remain profitable and stable. Table 2 presents the results of the leverage regression with both China and the U.S. analysis of firm-specific determinants of leverage. explanatory variable 2007 2008 2009 SIZE 0.404 (2.673)** 0.339 (2.461)** -0.394 (-2.103)** TANG 0.279 (1.776) 0.091 (0.617) 0.307 (1.929) Profitability (ROA) -0.596 (-4.693)** -0.719 (-6.075)** -0.22 (-1.212)** ** Significant at the 5% level Column one reports the regression for the full sample of 2007, column two provides evidence for the full sample of 2008 and column three the full sample of 2009 . The linear regression results show that corporate leverage is directly related to a number of firm-specific factors. We find that coefficients of SIZE are statistically significant and consistent with theoretical proposition in 2007 and 2008. Leverage of the banking industry in both China and the U.S. increase with bank size and smaller firms are expected to be financed less by debt because of the relatively larger information asymmetry problem before the financial crisis. With the high cost of debt, declining operating banks during the 2008 financial crisis decrease substantially funding with debt. As a result, leverage of the banking industry in both country decrease with bank size. There are two different views on how tangibility affects a firm's debt ratio. On the one hand, in some studies tangible assets serve as collateral, secure the debt of a firm, and are a good proxy for the reduced agency costs that result from the conflict of interest between bondholders and shareholders (Booth et al.,2001)[2]. This view suggests a positive relationship between tangibility and debt financing. On the other hand, Berger and Udell (1995) [13] show that firms that develop a close relationship with their creditors need to provide less collateral in obtaining debt financing, because a close relationship can substitute for physical collateral. Their argument indicates that tangibility has either a weakly positive or no influence on a firm's debt ratio. They also find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. From our sample statistics, we find that the result is consistent with traditional literature. We observe a positive relation between tangibility and debt financing during 2007~2009, even though the result is not strong enough. The coefficient estimates indicate that leverage is negatively related to profitability, which is consistent with recent international evidence (Rajan and Zingales, 1995) [8]. More profitable companies tend to have fewer debts. Table 3 presents the results with a country-to-country analysis of firm-specific determinants of leverage for the period of 2007~2009. explanatory variable 2007 2008 2009 CHINA U.S. CHINA U.S. CHINA U.S. SIZE .731 (5.020)** .131 (.559) .408 (2.044) .345 (1.375) -.066 (-.395) .234 (1.204) Profitability (ROA) -.280 (-1.809) -.477 (-2.157)** -.435 (-2.389)** -.017 (-.073) .015 (-5.584)** .047 (.233) TANG .132 (.972) .119 (.501) 0.214 (-1.598) .022 (.089) .015 (.103) .642 (3.437)** We start our discussion of the results with a country-to-country analysis of firm-specific determinants of leverage. We run regressions to explain leverage from firm-specific factors including firm size, profitability (ROA) and asset tangibility. We observe that notwithstanding the limited number of banks in the sample, the adjusted-R2 of all regressions is above 50%. We find that factors identified by previous studies as correlated in the cross-section with firm leverage in the U.S., are similarly correlated in China as well. Performing a simple statistical test, we find that the determinants of SIZE and TANG are insignificant while compared respectively during 2007~2009. It indicates that bank size effects not significantly. Normally, the bigger the enterprise scale is, the stronger its ability to resist risks, the lower bankruptcy cost will be, and more conducive to debt financing. Bank is a special financial enterprise, whose main form of debt is to absorb public deposits. With China's commercial Banks appeared on the market in succession, assets growth accelerate quickly. This situation, caused the insignificant result .It indicates that the often-made implicit assumption of equal firm-level determinants of leverage across countries does not hold. As for the impact of profitability (ROA), our findings are consistent with the asymmetric information theory which suggests that firms first use retained earnings for new investments and then move to debt and equity, if necessary . The expected negative relation between profitability and leverage is found in both countries. In this study, the latter argument appears to apply to both China banks and U.S. banks. Moreover, the State's presence has the potential to make the lenders demand less collateral. According to Jensen and Meckling's (1976) [14] framework, a high fraction of tangible assets owned by a firm mitigates the lender's risk, because these assets can be used as collateral. Hence, a large fraction of tangible assets is expected to be associated with high leverage. Tangibility can be used as a proxy for collateralization which is expected to be positively related to leverage. We think more research needs to be done to understand the impact of financial crisis on banks' capital structure choices.

Section VI: Conclusion Remarks

Capital structure theories have been mostly developed and tested in a large number of literatures. Researchers have identified several firm-specific determinants of a firm's leverage, based on the three most accepted theoretical models of capital structure, i.e. the static trade-off theory, the agency theory and the pecking-order theory. In recent years, international studies comparing differences in the capital structure between countries finds that a firm's capital structure is not only influenced by firm-specific factors but also by country-specific factors. Several recent studies on the field have indicated that institutional differences between developed and developing countries explain a large portion of the variation in the use of debt. Because the U.S. And China banks were facing different capital market mechanism, tax system, agency problems and different forms of ownership, the China banks experienced different distressed financial conditions that U.S. Banks faced during this financial crisis. In this study we use multiple logistic regressions to analyze the importance of country-specific factors in the leverage choice of banks from the U.S. as compare to China. The results of this study confirm the finding of De Jong, Nguyen, and Kabir(2008)[10] which reported there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage. We start our discussion of the results with a country-to-country analysis of firm-specific determinants of leverage. Results show that the determinants of SIZE and TANG are insignificant and are inconsistent with the prediction of conventional capital structure theories while compared respectively during 2007~2009.It indicates that smaller firms are expected to be financed less by debt because of the relatively larger information asymmetry problem, and more profitable firms will have less leverage. However, we find two different views on how tangibility affects a firm's debt ratio. In 2007, the sample statistics suggest a positive relation between tangibility and debt financing, while in 2008 the condition runs in reverse. On the other hand, we also observe that in each country one or more firm-specific factors are not significantly related to leverage when compared respectively. For both countries, our results for the impact of firm-specific factors like firm size and tangibility are consistent with theoretical predictions. Although the U.S. developed bond market stimulates the use of debt, the role of asset tangibility as collateral in borrowing will be rather limited for banks in the same country. In other words, country characteristics may explain why in China a bank's tangibility affects leverage, but not in the U.S. Moreover, the sudden break of financial crisis, which hits all the stock markets in the world and all internationally operating banks, may account for the reason. We think more research needs to be done to understand the impact of financial crisis on banks' capital structure choices. In summary, compared with developed banking industries, such as US, Chinese banking industry was not seriously affected by the latest financial crisis. This can be observed from the performance of Chinese banking industry during the financial crisis. China suffered less on dimensions of the financial system level. The most important reason is that the low level of openness of China's banking system, which lacks of systemic risk, helps to avoid the external transmission, and at the same time, that China's high savings rate provide for financial institutions to a stable, adequate source of funding that enables the financial institutions do not have to resort to high-risk, high-cost financing channels. Meanwhile, the revolution of capital restructure since the end of year 1993 also contributed to the stability of Chinese banking system during the global financial crisis. However, from the objective point of view, China's banking system is a product of a specific economic and social development stages. With China's further economic development and increasing demand for the growing diversity of financial services, the banking system is bound to become more open and financial markets more active, thus calls for higher financial supervision requirements. Finally, the influence of the financial crisis in foreign countries was weakened when it came to China due to some characteristics of Chinese capital market. However, we should not ignore the drawbacks of Chinese banking system. In order to further improve its competitive ability, Chinese banking industry should try the best to serve for the real economy, increase the speed of financial innovation under strict risk control management and further promote the reform of incentive and restraint mechanism.

Section Ac…A: Limitation

I have considered of the inaccessible data of all the banks involved in the banking industry, in this case, 20 banks listed in Shanghai Exchange are investigated. It is their obligations that exposure their financial reports legally. In this case, investigation-related data can be achieved. However, it brings about the imperfections and inaccuracy of the data. To some extend, the outcome of the dissertation can not reveal the essence of the whole banking industry. Consequently, data from the web or other media are considered as substitutions, affecting the accuracy of data. On the other hand, although we consider the importance of different institutional factors between U.S. and China, we do not discuss how institutional differences between countries can potentially affect how banks within both countries are financed specifically with institutional variables, such as a country's legal and taxation system, level of corruption and the preferences of capital suppliers, which may explain a significant portion of the variation in leverage and debt maturity ratios. And this should be our focus of future research. Finally, as the author of little talent and less learning, I am sure that the text of a number of inadequacies in the hope that readers criticism. The selected model does not observe bankruptcy risk to some extend this model can not reflect the total risk. Additionally, only equity financing and debt financing are considered even though some other financing ways exist.

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