An empirical study of the capital structure of the property companies in Hong Kong

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An empirical study of the capital structure of the property companies in Hong Kong

 

Author: Leung, Ho-yin Stephen
Title: An empirical study of the capital structure of the property companies in Hong Kong
Degree: D.B.A.
Year: 2006
Subject: Hong Kong Polytechnic University -- Dissertations.
Real estate business -- China -- Hong Kong.
Corporations -- China -- Hong Kong -- Finance.
Department: Graduate School of Business
Pages: 157 leaves : ill. ; 31 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2094054
URI: http://theses.lib.polyu.edu.hk/handle/200/18
Abstract: Modigliani and Miller (MM) published their first research on capital structure forty years ago. They concluded that there is no advantage for a firm to raise debts provided that there is a perfect market under a no-tax environment. Since then, many researchers have extended the study of the capital structure theory by relaxing some of MM's assumptions. Some other studies have examined the capital structure in different countries and industrial sectors. Although some conflicting results are found, much research showed that the industrial sector is an important determinant that affects the capital structure of a firm. Amongst the various industrial sectors, the property sector is an under-researched area with respect to capital structure. For their specific characteristics, managers of the property companies may consider different factors when making their decisions on leveraging. The period of this study is an 8-year one from 1996 to 2003 in which the property market in Hong Kong experienced extreme volatility. In 1997, the residential market soared by about 40% in one year, but then it lost half of its value in the subsequent six years. In this research, the panel data of the property companies listed in the Hong Kong Stock Exchange is used to examine the major determinants of their capital structure. This study's empirical test reveals that their capital structures are significantly affected by the tangibility of assets, level of development undertaking, profitability, growth, company size, systematic risk and property price index. However, the property investment income and interest rates appear to be insignificant determinants of their capital structures. The weak relationship between interest rates and the total debt ratio is quite surprising as it is contrary to the findings in most of the previous empirical studies. On the other hand, the inclusion of the property price index in this study's model has improved the empirical tests of the capital structure of property companies. It seems that the previous studies have failed to consider this important variable which shows a strong relationship with the gearing of property companies in this study.

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