This paper provides new evidence of supply side effects on corporate capital structure in China. We find that bank-dependent firms, that are large and state-owned companies in China, increase (decrease) their leverage ratios if loan supplies increase (decrease) relative to small and private firms due to their ability to access bank loans. With ability to substitute different forms of capital sources, large and state-owned firms are relatively less (more) likely to use internal funds and equity financing when bank loans are (not) available than small and private firms. During credit boom in 2009 and 2010, the large and state-owned firms increase leverage ratios by 2.26% and 2.76% more than matching firms; and small and private firms are shown to decrease leverage in this period. These findings lend support to the importance of supply side effects and bank loan segmentation on capital structure decisions.
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