Capital structure and financing situation of chinese real estate development companies listed in Mainland China and Hong Kong
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Insinööritieteiden korkeakoulu | Master's thesis
Real Estate Investment and Finance
Master’s Programme in Real Estate Economics
AbstractFinancing environment for real estate development companies is constrained in China. Many companies view overseas market as an opportunity. Hong Kong is the most popular one. A trend for Chinese real estate development companies to list in Hong Kong brings out a question about differences in capital structure between companies listed in mainland and Hong Kong. This thesis mainly focuses on studying financing choices of two types of Chinese real estate development companies, one listed in mainland and the other listed in Hong Kong. Capital structure theory is applied as the main theoretical framework. Discussion about financing situations for Chinese real estate development companies are presented, including Chinese real estate market and available financing alternatives. It is found that accessibility to overseas financing sources does have it advantages, which explains the motivation behind companies’ intention to list in Hong Kong. Empirical study is conducted based on the capital structure theory. Six determinants are selected including profitability, size, growth opportunity, tangibility, volatility, and ownership. Another variable is added in order to examine whether there is difference between mainland (A-share) and Hong Kong (H-share or red chip share) listed companies – HK dummy variable. Book total liability ratio and book total debt ratio are used as the proxy for leverage in the model to analyze factors influencing capital structure decision. Statistics show that real estate development companies listed in mainland are higher leveraged than those listed in Hong Kong. The two groups of samples are significantly different in statistical tests. Mainland-listed real estate development companies are featured as more leveraged, more tangible, less profitable, in higher growth opportunity and with higher operating risk, smaller size and less share of institutional shareholders. Regression result shows that HK is not influential to total debt ratio and its impact on total liability ratio remains further validation due to the limited explanatory power of the model. Influencing factors and the ways they are affecting leverage vary between the two kinds of companies. The model with total liability ratio as the dependent variable lacks powerful explanatory power. Profitability is negative with total debt ratio in mainland-listed companies and size is significantly associated with total debt ratio in a positive way. Other variables do not appear to be significantly related with the leverage in mainland-listed companies. On the other side, all the determinants except ownership are decisive to capital structure decisions of Hong Kong-listed Chinese real estate development companies. Profitability, size and growth opportunity are positively related with leverage while tangibility and volatility are negatively associated with leverage. Capital structure theory may be more suitable for companies listed in Hong Kong.
Thesis advisorValtonen, Eero
capital structure, chinese real estate development companies, Hong Kong, mainland China