Abstract
Our research investigates the connection between firm characteristics and leverage based on a sample of firms listed in the Chinese Stock Index 300. We aim to examine the sustainability of the financial structure of Chinese enterprises covering the period 2010–2019. We employ a conditional quantile regression that discloses the behavior of regressions across the leverage distribution and compares its results for different leverage levels with those achieved by the linear regression model. The results confirm the effects of the determinants of capital structure change since the quantile of leverage varies. We find that both the trade-off theory (TOT) and the pecking order theory (POT) confirm the validity of Chinese firms’ financing decisions at different quantiles of leverage. Specifically, the empirical results support the POT more over the TOT at higher levels of the quantile. Furthermore, the relationship between firm size and leverage strongly switches to support the POT at the highest quantile. All empirical results are obtained from quantile regression, consistent with the prediction for an increase in asymmetric information of the POT when Chinese firms employ more debt in their capital structure.
Highlights
The capital structure in firms is a central problem because it represents the power and resources that firms hold to allow managers to make financial decisions
Ordinary least squares (OLS) regression is a linear regression that estimates the unknown coefficient of independent variables by the least-squares principle
The ordinary least squares (OLS) regression is less effective when examining the effect of capital structure determinants on leverage
Summary
The capital structure in firms is a central problem because it represents the power and resources that firms hold to allow managers to make financial decisions. Substantial financial resources are conditions that help firms to assume better investment opportunities. Financial managers pursue maximizing firm value as both motivation and purpose. [1] suppose that the capital structure does not affect firm validity with all the basic assumptions. This theory has made crucial progress on this subject. Today we better understand the most critical research papers that started from the Modigliani and Miller assumptions, making the capital structure relevant to an economic entity’s plus value.
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