A Re-Examination of the Capital Structure Theory: Evidence from Chinese Listed Companies - Theoretical Economics Letters

TEL > Vol.8 No.5, April 2018

Theoretical Economics Letters

Volume 8, Issue 5 (April 2018)

ISSN Print: 2162-2078 ISSN Online: 2162-2086

Google-based Impact Factor: 1.19 Citations h5-index & Ranking

A Re-Examination of the Capital Structure Theory: Evidence from Chinese Listed Companies ()

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DOI: 10.4236/tel.2018.85066 1,138 Downloads 3,599 Views Citations

Author(s)

Liang Guo^1*, Yu Liu¹, Ya Dai², Hongxian Zhang³

Affiliation(s)

¹Department of Accounting and Finance, Jack H. Brown College of Business and Public Administration, California State University, San Bernardino, CA, USA.
²College of Business, Metropolitan State University of Denver, Denver, CO, USA.
³College of Arts, Sciences, and Business, Missouri University of Science and Technology, Rolla, MO, USA.

ABSTRACT

In this study, we examine whether and to what extent the main stream capital structure theories developed in Western countries apply to Chinese listed companies during its most recent transition period after year 2000. Specifically, we examine a variety of trade-off and pecking order models and compare their performance by nesting these two different models in the same regression. Using market-based leverage data from 1057 non-financial Chinese listed firms during the period from 2000 to 2011, we present empirical evidence indicating that: firstly, equity tracks the financing deficit better than debt in Chinese firms, which is not consistent with the pecking order theory. Secondly, Chinese firms seem to be more sensitive in expanding debt for meeting their financing needs than in using surplus for retiring debt. Thirdly, Chinese firms have an optimal market-based leverage ratio. Both the partial adjustment and error correction models suggest that Chinese firms adjust towards target leverage slowly before 2006. However, after 2006, they accelerate their leverage adjustments at a speed as fast as that documented in the developed markets. The increasing adjustment speeds are attributed to the shrinking transaction costs and agency costs caused by recent currency and share-split structure reforms. Overall the trade-off theory works better than the pecking order theory in explaining Chinese firms’ capital structure. Chinese companies’ financing behaviors are becoming more akin to those in the developed market with increasing integration and financial liberalization.

KEYWORDS

Capital Structure Theory, China’s Structural Reforms, Optimal Leverage Ratios

Share and Cite:

Guo, L. , Liu, Y. , Dai, Y. and Zhang, H. (2018) A Re-Examination of the Capital Structure Theory: Evidence from Chinese Listed Companies. Theoretical Economics Letters, 8, 935-959. doi: 10.4236/tel.2018.85066.

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