The impact of loan rollover restrictions on capital structure adjustments, leverage deviations, and firm values

Abstract We use a Chinese regulatory change as a quasi-natural experiment to study the impact of short-term lending regulation shocks on firms. Specifically, we use a difference-in-differences method to identify the effects of the Chinese Lending Guideline 2007, which imposed a restriction on the rollover of short-term loans, on capital structure adjustment speeds, leverage deviations, and values of firms. We show that after the rollover restrictions, the capital structure adjustment speed slows down, and the capital structure deviation increases. Moreover, due to improved corporate governance, firms more relying on short-term loans increase their value more than their counterparts.