Corporate deleveraging and financial flexibility: A Chinese case-study

Using a firm-by-firm longitudinal approach, we find that highly levered firms in the United States and China systematically deleverage to restore financial flexibility over a median six-year period. In the Chinese context, the deleveraging period from the market leverage peak to trough is five years for non-state owned enterprises (non-SOEs) and developing firms, and seven years for SOEs and mature firms. Non-SOEs and developing firms are less capable of restoring financial flexibility than their SOE and mature firm counterparts. Debt repayment is the main contributor to the deleveraging process for both Chinese and US firms. Share issuance contributes more than the retained earnings in the deleveraging process for Chinese firms.