An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Chao Chen
California State University Northridge and Tsinghua University

Rongjie Chen
Tsinghua University Beijing

Xiao Chen
Tsinghua University Beijing

Abstract: Unique institutional structure of Chinese stock market often leads to the distortion of corporate financing behavior, a phenomenon that has been widely documented in the literature. However, most previous studies in this field have concentrated on equity financing, especially rights offering while ignoring debt financing as an important alternative. This paper examines the financing behavior of firms after making the decision to utilize rights offering. Empirical findings suggest that debt financing is significantly increased after rights issuance, which results in a higher leverage ratio. Leverage changes are positively influenced by the proceeds from rights offering, which is consistent with the “money encirclement” hypothesis. Our evidence also indicates that the leverage increases as ownership concentration increases following rights issuance. The empirical results appear to be robust.

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