A Study of the Relationship Between Debt Ratio and Profitability of the Real Estate Companies——Evidence from China

In this study, we discuss the relationship between debt ratio and profitability of listed real estate companies in China. We estimate the data of 88 listed real estate companies from 2014 to 2018 by using the simultaneous equation model and GMM method to address the problem of endogeneity. The empirical study showed that the increase in profitability of companies contributes to the reduce in their debt ratio. Interestingly, the debt ratio also has a U-shaped impact on profitability in return. Due to the different nature and scale of real estate companies, the cost of debt financing may vary. Therefore, the impact of debt ratio on profitability for companies in this industry could be non-linear. These results suggest that large and state-owned companies should pay more attention on improving performance and efficiency during transition, and there should be stricter limits on their debt ratios. For small-sized and non-stated owned companies, the assistance from government is needed when dealing with debt financing difficulties.