Policy Constraints and Corporate Financing : A Quasi-Natural Experiment from Chinese Real Estate Developers

Exploiting a policy-induced discontinuity in Chinese real estate companies’ access to external debts, we study how the debt growth constraints of the “three-red-line” policy affect corporate financing. Consistent with a disciplining hypothesis, the policy reduces interest-bearing debt financing of the affected companies by roughly 2-3 percent. We further find a negative spillover effect of the policy on equity financing, where the affected companies experience a drop in the frequency of seasoned equity offerings and the size of paid-in capital relative to the control group by roughly 16 percent and 5 percent. The negative spillover effect is further validated with decreased equity value and increased deviations from the target capital structure of the affected companies