| Author: | Chan, Ling Wah Edward |
| Title: | Sales tournament, capital structure, and financial distress : a study of property developers in China |
| Advisors: | Shen, Jianfu Jeff (BRE) |
| Degree: | DIREC |
| Year: | 2024 |
| Subject: | Residential real estate -- China Real estate developers -- China Real estate business -- China-- Finance Hong Kong Polytechnic University -- Dissertations |
| Department: | Department of Building and Real Estate |
| Pages: | 111 pages : color illustrations |
| Language: | English |
| Abstract: | The downfall of the Chinese residential property market since the second half of 2021 has led many Chinese residential property developers into financial distress. A key reason why so many of them went into financial distress was due to their high indebtedness and high debt leverage. The two existing mainstream capital structure theories, namely, the trade-off theory and the pecking order theory, do not seem to be able to explain the phenonium behind the capital structure decisions of Chinese residential property developers. The purpose of this thesis is to explore whether there are other capital structure theories and factors that could better explain Chinese residential property developers’ capital structure decisions. This thesis argues that the combination of the supply side theory of capital structure and the agency theory could better explain Chinese residential property developers’ choice of capital structure. Particularly, it shows that sales ranking is an important capital structure determinant. The study covers a ten-year study period from 2013-2022, including a short downturn in primary residential property sales in 2014, a major sales boom period from 2016-2020, as well as the major downturn since the second half of 2021. The sample includes 184 major Chinese residential property developers. These developers are listed in Shanghai, Shenzhen, Hong Kong, Singapore, and New York. The research methods include the use of regression analysis to test the relationships between sales ranking and its corporate outcomes, including leverage, investment, and the probability of financial distress. The findings support the supply side theory of capital structure. On average, the mean debt to capital ratio (in time t) of Chinese residential property developers with sales ranking (entering the list of top 100/200 developers in China according to sales in time t-1) was 15.5% higher than Chinese residential property developers without sales ranking (in time t-1). After controlling for demand-side and liquidity factors, the debt to capital ratios of Chinese residential property developers with sales ranking (in time t-1) were also 3.66% higher than Chinese residential property developers without sales ranking (in time t-1). Similarly, the debt to capital ratios of Chinese residential property developers that saw an improvement in sales ranking (in time t-1) was higher than their peers that did not experience an improvement in sales ranking (in time t-1) by 2.02%. It is argued that this is due to the reason that financial institutions in mainland China were more willing to lend to developers that were on the sales ranking list or have seen an improvement in their sales ranking. According to the findings, this is particularly true during the industry boom period of 2016-2020 and for privately-owned developers. The findings also support the agency theory that firm managers may have incentives to grow their firms beyond optimal sizes based on their self-interests. The investment growth of Chinese residential property developers with sales ranking (top 100/200 developers in time t-1) was 22.42% higher than Chinese residential property developers without sales ranking (in time t-1). Similarly, the investment growth of Chinese residential property developers that saw an improvement in sales ranking (in time t-1) was higher than their peers that did not experience an improvement in sales ranking (in time t-1) by 19.13%. The findings also show that 48% of Chinese residential property developers that have a sales ranking or 68% that saw an improvement in sales ranking during the industry upcycle in 2016-2020 face financial distress during the industry downturn since 2021. On the other hand, only 18% or 25% of their peers without sales ranking or an improvement in sales ranking respectively face financial distress. This is likely due to the reason that Chinese residential property developers that have a sales ranking or an improvement in sales ranking would also subsequently have higher debt leverage and excessive investments, leading to a higher probability of financial distress during the industry downturn. This thesis will be the first research focusing on explaining the capital structure decisions of Chinese residential property developers related to their behaviours to compete for sales ranking, i.e., a sales tournament. Developers in China could have engaged in the game of sales tournament to obtain debt financing to roll over their developments and to achieve a “too-big-too-fail” status. This thesis aims to fill the gaps in existing capital structure theories, and particularly, to help better explain the capital structure decisions of Chinese residential property developers. This is an important topic as the financial distress of Chinese residential property developers has led to significant economic losses. This thesis also aims to help stakeholders of the residential property industry globally, such as developers, financial institutions, and regulators, to learn from the mistakes made at the Chinese residential property market, and to avoid such mistakes in the future. |
| Rights: | All rights reserved |
| Access: | restricted access |
Files in This Item:
| File | Description | Size | Format | |
|---|---|---|---|---|
| 7620.pdf | For All Users (off-campus access for PolyU Staff & Students only) | 1.07 MB | Adobe PDF | View/Open |
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