Topic: Deleveraging Regulation and Alienation of Business Combination Scope - Evidence from Abnormal Joint Arrangement

Speaker: Chao Zhang

Date & Time: 10:00-11:30 Thursday, March 23, 2023

Venue: Room 245, Quan Xue Building

Organizer: School of Accounting, Dongbei University of Finance and Economics, P.R. China

Abstract:

Effective regulation of high leverage risks in enterprises is the micro-foundation to prevent and mitigate major financial risks. The paper reveals a new way for enterprises to manipulate book leverage ratio from the perspective of “alienation of business combination scope” - listed companies identify the invested entity whose shareholding is more than 50% as joint or cooperative venture, thus excluding it from their own consolidation scope (i.e. not recognized as a subsidiary), so that they only need to reflect the net assets of the entity in the form of long-term investment, thereby increase total consolidated assets while maintaining the same consolidated liabilities, and then decrease the book liability ratio. Take the introduction of deleveraging regulation policy in 2015 as exogenous shock on the motivation for corporate leverage manipulation, the paper constructs a difference-in-difference model for empirical research and finds that:

i. After the introduction of deleveraging regulation policy, the number of abnormal joint arrangement of companies with high leverage ratio (i.e. companies with stronger motivation to manipulate to decrease the book leverage ratio) increased significantly compared with companies with low leverage ratio before the introduction.

ii. The behavior that companies take advantage of abnormal joint arrangement to manipulate book leverage ratio is closely related to group’s debt model and the strength of leverage manipulation motivation. Specific performance is that the above findings are more obvious when leverage of subsidiaries has a greater impact on the overall leverage ratio of the company and the leverage ratio of the company is higher before the introduction.

iii. There is a trade-off between real deleveraging and leverage manipulation in the companies, which is reflected in the fact that companies with less real deleveraging capability tend to manipulate book leverage ratio through abnormal joint arrangement.

In addition, all regression analyses in this paper control the leverage control measures constructed by existing literature, which strongly validates that the abnormal joint arrangement discussed in the paper is a brand new way to manipulate leverage and cannot be measured by existing measures. This paper expands the research on leverage manipulation from the perspective of alienation of of business combination scope, and provides practical inspiration for regulatory authorities and stakeholders to fully evaluate the leverage risk of enterprises.

Introduction of Speaker:

Chao Zhang, specially hired excellent PhD from School of Accounting, Dongbei University of Finance and Economics, P.R. China, PhD of Accounting of Sun Yat-sen University, P.R. China. Research fields include accounting, corporate finance and governance, etc. The relevant achievements have been published in the journals such as “Journal of Management World”, “Journal of Management Sciences in China”.

Special Attention:

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