Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?

•This paper investigates the relationship between TFP (Total Factor Productivity) and leverage of Chinese non-listed firms during 1999-2007.•Our research offers new evidence that TFP is another important measurement of firm performance and can determine the capital structure.•TFP is significantly and positively associated with leverage of private and foreign owned enterprises, but insignificantly correlated with state-owned enterprises.•Financial constraints, leverage costs, and the institutional environment can affect the relation between TFP and leverage.•TFP also plays a significant and positive role for formal and informal leverage.

This paper investigates the relationship between TFP (Total Factor Productivity) and leverage measures (total, short-term and long-term leverage) of Chinese non-listed firms during the period 1999-2007. First, TFP is significantly and positively associated with the three leverage measures of private and foreign owned enterprises, but insignificantly correlated with state-owned enterprises. Second, financial constraints, leverage costs, and the institutional environment can affect the relation between TFP and leverage; this relation tends to be much stronger when enterprises face stronger financial constraints, higher leverage costs, and an underdeveloped institutional environment. Third, we show that TFP also plays a significant and positive role on formal and informal leverage. Our research offers new evidence that TFP is an important determinant of capital structure choices.