Does Financial Reporting Quality Affect Optimal Capital Structure？ Evidence from China

• Published in: Frontiers of business research in China Vol. 10; no. 3; pp. 432 - 450
• Main Authors: Zhang, Bo, Wei, Hanze, Ma, Lijun
• Format: Journal Article
• Language: English
• Published: Beijing Higher Education Press 01.01.2016; Higher Education Press Limited Company
• Subjects: bank connections; Capital structure; Correlation analysis; Financial reporting; financial reporting quality; optimal capital structure; Quality; state-owned enterprises; Studies; 中国; 内生性; 组织决策; 证据; 财务报告; 质量; 资本结构; 非国有企业
• ISSN: 1673-7326; 1673-7431
• DOI: 10.3868/s070-005-016-0015-7

In this study, we investigate the association between financial reporting quality and a firm＇s deviation from its optimal capital structure. We find that a firm＇s deviation from its optimal capital structure is decreasing in financial reporting quality. The results suggest that high-quality financial reporting helps to reduce a firm＇s deviation from its optimal capital structure. In addition, we document that the relationship is intensified in non-SOEs, in which financial reporting quality plays a more crucial role. Furthermore, we find that bank connections diminish the role of financial reporting quality in optimal capital structure. Our results hold when we control for potential endogeneity in financial reporting quality and capital structure decisions. Our study contributes to both financial reporting quality and capital structure literature. We also contribute to the literature on informal contracts in organizational decision-making.