Abstract
The study follows mean reversion approach and applies different panel unit root tests on a balanced data-set of 8,670 firm-year observations of Chinese non-financial firms, spread over ten years (2003-2012). The objective of the study is to investigate whether the leverage behaviour of Chinese non-financial firms is mean reverting and consequently, to decide between two competing theoretic frameworks (trade-off theory, pecking order theory). Overall panel test results for short term, long term and total leverage support trade-off financing behaviour. Further, the study categorises firms into state-owned and private firms and compares the leverage behaviour of two categories. The results of comparative analysis explain that leverage behaviour of both types of the firms (state-owned firms, private firms) is mean reverting and therefore supports trade-off theory of capital structure. Our study indicates that both types of the Chinese firms (state-owned firms, private firms) follow long-term financing strategy that is very important for the firms operating in an emerging economy.
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