GEP 10/13: Does social capital affect the financing decisions of Chinese small and medium-sized enterprises?

Summary

We examine the financing decisions of Chinese SMEs. We find that social capital matters for firms seeking to establish initial relationships with their financiers, while asset structure matters in the consolidation of these relationships.

Abstract

Using a panel of 65,551 firms over the period 2000-2006, this study examines the capital structure determinants of Chinese privately owned small and medium-sized enterprises. Investment in the building and maintenance of social capital, measured by entertainment expenditure, is found to be positively associated with short-term leverage, but negatively associated with long-term leverage, while the opposite is the case for asset structure. This suggests that social capital is important for firms who seek to establish initial relationships with their financiers, while asset structure is more important in the consolidation of these relationships.

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Authors

Jun Du, Alessandra Guariglia, and Alexander Newman

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