The relationship between capital structure and profitability: Evidence from China

Abstract

The objective of this study is to investigate whether the capital structure has an impact on profitability in Chinese A-share firms. I employ multiple proxies to measure profitability: (1) Return on Equity, (2) Return on Assets, and (3) Profit Margin. I use three proxies to measure capital structure: (1) Ratio of Short-term Debt to Total Assets, (2) Ratio of Long-term Debt to Total Assets, (3) Ratio of Total Debt to Total Assets. Using a large sample of Chinese A-share companies from 2009 to 2018, this paper finds that a significantly negative relationship exists between capital structure and profitability. I use Pearson Correlation Analysis and Ordinary Least Square Regression to test the effect of short-term debt, long-term debt and total debt on profitability, respectively. These results indicate that Chinese listed companies prefer equity financing to debt financing and help managers to find the optimal capital structure.