Over-capacity and Dynamic Adjustment of Capital Structure

Over-capacity is a hot issue under China's supply-side reform. Does over-capacity affect the adjustment speed of firms' capital structure? We use partial adjustment capital structure model to measure firm's adjustment speed of the capital structure. And use the capacity utilization as an indicator of over-capacity to find how over-capacity can influence the adjustment speed of capital structure at the micro-level. We also regress our model by different industry groups. Finally, we find that firms in industrial and commercial, a higher level of over-capacity will lead to the slower adjustment speed of capital structure, but there are not significant in Utilities, Real Estate and Consolidated. This study reveals that over-capacity in industrial and commercial sectors will reduce the adjustment speed of capital structure and provide the basis for the need for supply-side reform.