Capital structure determinants of private small and medium-sized enterprises in China

This thesis examines the capital structure determinants of private SMEs in China and the extent to which financial theories of capital structure adequately explain their financing behaviour. It also investigates whether other theoretical perspectives can be utilised to explain their capital structure decisions. In order to investigate these issues a mixed method approach is utilised, combining analysis of secondary data, with field research in the form of semi-structured interviews and survey questionnaires. Data analysis indicated that financial theories of capital structure alone do not provide a full explanation as to how SMEs are financed due to distinct institutional and cultural differences between China and the developed economy context in which these theories were developed. In order to better explain the financing behaviour of Chinese SMEs a theoretical model was developed based on insights from interviews with SME owner managers and the existing literature. This model highlighted the role played by managerial strategy, psychology, human capital and network ties in small business financing. Such factors are shown to be influential in determining the capital structure adopted by Chinese SMEs and are not taken into account by existing theories of capital structure in the finance paradigm. Based on the findings of this research theoretical and policy implications are provided. In order to support the continued growth of the SME sector Chinese government authorities should consider providing better support to entrepreneurs to access the formal financial sector. SME owner/managers must also understand the impact of their behaviour on the ability to access external financing and consider improving their accounting and information systems to reduce information asymmetries between themselves and their lenders.