Operational performance, state ownership and capital structure: the Chinese context

Purpose This paper investigates the relationship between ultimate ownership, capital structure and firm performance in the Chinese context. Design/methodology/approach This study uses a sample of publicly listed manufacturing firms in China over a 12-year period and utilize the multilevel and longitudinal modelling by employing estimators such as the random effects model and Mundlak to address the possible unobserved heterogeneity in the data. Findings This study finds a curvilinear relationship between firm leverage and operational performance. The findings suggest that debt as a corporate governance mechanism has two-faced effects on firm performance. The effect of leverage on firm performance tends to be positive when leverage is low, but the effect diminishes and becomes negative as leverage increases. In general, state-owned enterprises (SOEs) are less profitable than non-SOEs in China. But this difference is not significant at the low or high level of leverage. The relationship between leverage and firm performance is more pronounced for non-SOEs than for SOEs, implying that non-SOEs are more sensitive to the effects of debt. The empirical results also show that different types of ultimate ownership not only affect firm performance but also interact with capital structure. Originality/value The study contributes to the growing literature on ultimate ownership and debt in corporate governance from an emerging economy context.