TITLE:
A Re-Examination of the Capital Structure Theory: Evidence from Chinese Listed Companies
AUTHORS:
Liang Guo, Yu Liu, Ya Dai, Hongxian Zhang
KEYWORDS:
Capital Structure Theory, China’s Structural Reforms, Optimal Leverage Ratios
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.5,
April
12,
2018
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.