Market Capitalized Scale and Corporate Capital Structure — Evidence from CSI300’s Listed Firms

The firm’s market capitalization is an ideal proxy of the size of listed firms. Hence, this paper uses the firm’s market capitalization to capture the firm size instead of using other prior proxies to investigate the relationship between the market capitalized scale and corporate capital structure by employing the Generalized Method of Moments (GMM) method to conduct analysis based on a sample of the 300 largest listed firms in China from 2010 to 2017. The CSI300 list consists of two subsample (CSI100 and CSI200), divided upon the firm’s market capitalized scales to represent both large-cap and small-cap firms. Our paper contributes to the literature on corporate finance by obtaining some new empirical results to assess the effect of market capitalized scale on corporate capital structure. We find that the market capitalized size has a significantly negative association with corporate leverage. We also find that both the Trade-Off Theory (TOT) and Pecking-Order Theory (POT) can partially explain the capital structure of the listed firms of the CSI300 Index such that the negative relationship between the market capitalized scales and corporate leverage is firmly identified in small-cap firms. Third, we observe that the greater validity of the POT’s predictions is enhanced in small-cap firms such that the greater inverse impact of profitability and the more significant positive effect of growth opportunities on corporate leverage are clearly shown in small-cap firms. Inversely, the more significant adverse effects of non-debt tax shields on corporate leverage are found in large-cap firms and there is no difference in the impact of tangible assets on debt ratios between CSI100’s listed companies and CSI200’s listed enterprises. Academics and practitioners could use our findings to draw better implications while policymakers could use our results to obtain better policies to improve the banking system with small listed companies.