On the Capital Structure of Foreign Subsidiaries: Evidence from Panel Data Quantile Regression Models

Plantation is a promising sector, but just like other firms, this sector will also face the financing problem. Capital structure determines the cost of capital and the risk assumed by the firm. Trade-off and Pecking order theory are the most common theory used to determine the capital structure. The objective of this research is to examine plantation companies tend to use trade-off theory or pecking order theory in determining the capital structure decision. This research used multiple linear regression analysis methods with capital structure as the dependent variable, and the asset structure, firm size, company growth, institutional ownership, effective tax rate, and non-debt tax shield as the independent variables.This is a quantitative research that uses secondary data from financial statements of plantation companies listed in the Indonesia Stock Exchange for 2014 to 2019. The sample was determined by using the purposive sampling technique and 5 out of 21 companies fulfill the sampling requirements. This study conducted observations for 6 years with a total of 30 research samples. The results of this research are both trade-off and pecking order theory are used and still relevant in the capital structure determination. Trade-off theory exerts more influence on capital structure decisions than pecking order theory. This is confirmed by the partial T-test where firm size, institutional ownership, effective tax rate, and non-debt tax shields suggest the use of trade-off theory, only asset structure indicates the tendency of pecking order theory.

The corporate finance literature has focused on explaining the determinants of firms target capital structure and speed of adjustment using the well-established theories such as pecking order, signaling and trade-off theories. However, less attention has been paid to understanding the financing behavior of farm businesses using these theories. Unlike corporate firms with professional management, farm businesses are different in a way that family members participate in management, the owner is often the manager, the decision-making unit is small, and farms heavily depend on government subsidies to stabilize income. These distinctive setting in farm business may result in different patterns of capital structure decision-making. Hence, we evaluate the application of corporate finance theories in the context of understanding the relationship between target capital structure and profit in the farm business. We use a dynamic partial adjustment model to examine the determinants of capital structure and speed of adjustment, and detect capital structure theories with which the leverage ratio of farm business would comply. Our sample comprises a panel of 1500 Dutch farms over the years 2001 to 2015. We find strong evidence that farms prefer internal funds to external funds. Profit is negatively related to leverage, supporting the pecking order theory, which has often been rejected for large firms. Consistent with the signaling theory, we find that size is positively related to leverage. Farm asset structure, growth, investment, and earnings volatility significantly determine the target capital structure. An interesting finding is that farm leverage is highly persistent and that lagged leverage is the best predictor of subsequent leverage ratios. Also, farms appear to have target leverage ratio and are reported to adjust their leverage towards the optimal level. The speed of adjustment to the target capital ranges from 8.6% to 63%, and varies by farm size and farm. This evidence further confirms the existence of dynamics in the farm capital structure decision. This article provides insights to understanding the dynamic nature of farm capital structure and the applicability of capital structure theories in the farm business.

The aim of the present study is to examine which of the two main rival theories of capital structure (trade-off and pecking order theories) better explains the behaviour of the Greek firms' capital structure during debt crisis. The sample consists of accounting data for 142 non-financial listed in Athens stock exchange (ASE) firms for a period from 2008 to 2014. Using panel data analysis, three regressions are estimated for three periods: 2008–2014, 2008–2010 and 2011–2014. The statistical analysis: 1) supports that trade-off theory better explains the firms' capital structure during the total period and the second sub-period, while the combination of pecking order theory and trade-off theory during the first sub-period, 2) indicates that the change of the economic conditions due to the memorandum of understanding (MoU), signed between the Greek Government and its creditors and the debt crisis may led the firms to adjust their capital structure, 3) provides evidence that during 'regular' economic conditions, both capital structure theories are applied, while in economic conditions of a severe debt crisis that is accompanied by changes in tax rates, the trade-off theory is dominant.

Capital structure theories offer a framework to understand how firms determine their mix of debt and equity financing. These theories, such as the trade-off theory, pecking order theory, market timing theory, agency theory, and theories of corporate control and input/output market interactions, provide insights into the roles of internal company characteristics and external economic conditions for corporate financing decisions. They explain firms’ preferences for and access to different financing sources based on factors like tax benefits, bankruptcy costs, agency costs, information asymmetry costs, and market conditions. Internationally, these theories take on additional dimensions due to differences in tax regimes, legal and institutional environments, and market structures. For example, the trade-off theory, which balances the tax advantages of debt against the costs associated with financial distress, varies significantly across countries because of differing bankruptcy and tax laws. Similarly, the pecking order theory, which suggests firms prefer internal financing over external debt, and external debt over equity, is influenced by the development of financial markets and the level of information sharing in different countries. The market timing theory posits that firms capitalize on market conditions by timing their financing decisions based on market valuations of debt and equity, with its applicability differing internationally due to variations in economic cycles and investor sentiment across markets. Agency theory and theories of corporate control delve into how conflicts between managers, shareholders, and debt holders shape financial strategies, with variations arising from different corporate governance structures and enforcement levels globally. The input/output market interactions theory asserts that firms determine their capital structure based on their market position, which can vary significantly due to differing international market demands and competitive landscapes. Empirical research provides insights into how these diverse factors play out across different legal, regulatory, economic, and cultural environments. International studies have shown that leverage determinants like corporate and personal tax rates, corporate governance and ownership structure, market conditions, and institutional frameworks significantly impact capital structure decisions globally. Moreover, cultural differences also play a crucial role in shaping financial decisions, influencing managerial attitudes toward risk. These insights are critical for multinational corporations and policymakers, as they highlight the necessity of considering a broad array of factors, including tax considerations, market conditions, legal and social frameworks, corporate governance and ownership structure, investor behavior, and institutional and regulatory environments, when making decisions about capital structure in an international context. This comprehensive understanding helps in creating conducive environments for effective corporate financing choices on a global scale.

The purpose of this paper is to present empirical evidence on the determinants of capital structure and firm value in a newly industrialized country. The firm characteristics are analyzed as determinants of capital structure according to different explanatory theories. Previous research mainly focused on the determinants of capital structure or the impact of capital structure on company value, while this study will discuss the effect of capital structure determinants on company value, with capital structure as mediating variable. The investigation has been performed using a sample of 647 companies listed on the Taiwan Stock Exchange (TSE) from 2005 to 2009. The findings of this study suggest that firm size, profitability and asset structure can be considered explanatory variables of capital structure. The firm size, profitability and capital structure affect book value. The determinants of market value are profitability and firm size. In addition, there are some differences in the capital structure among industry types. When the dependent variable is book value, firm size and growth opportunity have a greater impact on this in the electronic industry. Meanwhile, profitability and firm size have a greater impact on capital structure in non-electronic industries. When the dependent variable is market value, larger companies can borrow more debt and create more market value in the electronic industry. The capital structure negatively affects market value in electronic firms, but does not affect market value in non-electronic ones. Key words: Capital structure, firm value, corporate finance, trade off theory, pecking order theory.

Capital structure has an impact on the short and long term. Funding provided by banks is inseparable from the availability of funds from third parties in the form of savings, demand deposits and deposits. The entry of third party funds must be balanced with the funds disbursed by the company. Therefore, management policy greatly determines the position and composition of funding. This study aims to analyze and determine several capital structure theories, namely Pecking Order Theory, Trade-Off Theory and Market Timing Theory. The variable of Pecking Order Theory is represented by funding deficit, long-term debt, and total debt. The variable of Trade-Off Theory is represented by tangi-ble assets, growth, size, profitability, total debt, and long-term debt. The variable of Mar-ket Timing Theory is represented by Equity Finance Weighted Average of market to book ratio and leverage ratio. This research is quantitative research. The samples used in this study are 100 data of commercial banking companies listed on IDX period 2011 - 2015. Data are obtained using purposive sampling method from banks registered at www.idx.go.id. Multiple Liner Regression is used in analyzing data using SPSS IBM 23. The results of the research show that Trade-Off and Market Timing Theories can be implemented by banking companies in terms of determining capital structure. This re-search implication is to enhance management choices, especially on how to set capital structure of the company.

Numerous empirical studies in the finance field have tested many theories for firms’ capital structure. The pecking order theory and the trade-off theory of capital structure is among the most influential theories of firms’ capital structure. The trade-off theory predicts optimal capital structure, while the pecking order theory does not predict an optimal capital structure. According to pecking order theory, the order of financial sources used is the source of internal funds from profits, short-term securities, debt, preferred stock and common stock last. The main objective of this study is to econometrically test whether the listed companies in Indonesian Stock Exchange follow the pecking order theory or the trade-off theory. Samples in this study are public companies listed during 2009-2010. The research questions are tested by running regression models. The empirical result of this study shows that the pecking order theory is not supported, while the trade-off theory is supported. This suggests that the capital structure of listed companies in Indonesian Stock Exchange is financed based on optimal capital structure, not by the order financial resources.

The purpose of this paper is to investigate the factors affecting capital structure decisions of listed hotel companies in the Colombo Stock Exchange (CSE). Different classical capital structure theories are reviewed such as Modigliani and Miller Model (M & M Theory), trade-off theory (TOT) and pecking order theory (POT) to formulate testable propositions concerning the determinants of debt levels of the companies. The model is estimated using a panel data approach for twenty-five CSE companies for the period of 2009-2015. Regression models were used to test variables representing growth opportunities, firm size, profitability, effective tax rate, operational risk, tangibility and net commercial credit position. The findings suggest that profitability, growth opportunities, and net commercial credit position are related negatively to the debt ratio, while firm size, tangibility, operational risk and effective tax rate do not appear to be related to the debt ratio. Although the findings partially support both the pecking order theory (POT) and trade-off theory (TOT), neither the trade-off nor the pecking order theory exactly seems to explain the capital structure of Sri Lankan hotel companies.

Earnings management and theoretical adjustment in capital structure performance pattern: Evidence from APTA economies

Our study investigates Chinese manufacturing firms listed on both the Shanghai and the Shenzhen Stock Exchanges. These firms follow the pecking order or trade-off theories in their capital structure choices. Using panel data from the Taiwan Economic Journal and quantile regression, we construct three models to compare the two theories. Our first model tests the impact of profitability, tangible asset, firm size, and investment opportunities on leverage; our second model adds the dividend payout ratio to test the robustness of the first model; and our third model tests how leverage, profitability, firm size, and dividend variables affect a firm’s investments. From the results of all the models used in our study, we find a negative relationship between leverage and both profitability and the dividend payout ratio and a positive relationship between leverage and growth in a firm’s investments. We also find a negative relationship between dividends, firm size, and growth in a firm’s investments and a positive relationship between investment capital and profitability. The overall results indicate that the capital structure decisions of Chinese manufacturing firms are best explained by the pecking order theory.

This study investigates the applicability of the Trade-Off Theory of capital structure in the politically unstable environment of Palestine, emphasizing how political stability moderates the influence of firm-specific financial factors. The analysis uses panel data from 23 non-financial firms listed on the Palestine Exchange over the period 2012–2022. Multiple econometric techniques were employed, including Ordinary Least Squares (OLS), Fixed Effects and Random Effects models, Generalized Method of Moments (GMM), and Quantile Regression, to ensure robust results. The findings reveal a significant negative relationship between profitability and leverage, supporting the Pecking Order Theory under conditions of political uncertainty. Political stability is shown to have a moderating effect, influencing both the magnitude and direction of the relationships between leverage and other firm-level characteristics such as firm size, sales growth, and industry. Capital structure decisions in fragile and conflict-affected economies cannot be fully explained by traditional financial theories alone. Instead, they reflect a complex interaction between internal financial characteristics and external institutional factors. The findings offer valuable insights for policymakers, investors, and corporate managers operating in politically unstable environments, helping them make more informed capital structure decisions under uncertainty.

This paper investigates the determinants of capital structure in unlisted firms in New Zealand. Hypotheses utilising pecking order theory, trade-off theory and agency costs theory and the effects of firm ownership structure, firm characteristics and industry on small business capital structure determinants are empirically examined. 11 years of data for 120 unlisted small businesses are collected and 1320 observations are analysed using dynamic panel GMM estimation. The results indicate that managerial ownership, firm characteristics and industry are important determinants of capital structure. Moreover, this study finds firm ownership and characteristics have opposing relationships with long- and short-term capital structure choices. Though the results generally support pecking order theory, they indicate a potential need for different capital structure theories for long-term debt choice and short-term debt choice, in small firms.

The purpose of this paper is to examine determinant of capital structure of Iranian listed companies based on trade off theory and pecking order theory of capital structure. There are many factors that may affect capital structure choice. However, this study focuses on four important characteristics of Iranian firms and tries to clarify their impact on capital structure. The dependent variable is firm’s leverage ratio and independent variable consists of tangibility, profitability, growth and business risk. This study uses financial information of 133 Iranian listed companies on Tehran Stock Exchange for the period of 10 years from 2005 to 2014. The OLS regression model is used to determine relationship between dependent and independent variables. Finding show that profitability is the most important determinant of capital structure for Iranian companies followed by tangibility, growth and business risk. Profitability and business risk are inversely correlated with debt ratio, while liquidity and growth are directly associated to debt ratio. Results of hypothesis testing based on relationship between independents and dependents variables are fully in line with pecking order theory, while it partially supports trade of theory in short, capital structure of Iranian firms is completely explained by pecking order theory of capital structure.

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.

Using the 2008 corporate income tax reform as an opportunity, this paper constructs a Panel DID model to study the effect of corporate income tax and the degree of marketization on capital structure. Based on the 2008 Enterprise Income Tax Reform in China, accompanying with both rise and fall in the tax rate, the paper tests the adaptability of the Modigliani & Miller theory, and develops a capital structure theory in the context of China. Author’s used the financial data of 206 Chinese listed companies from 2002 to 2012. The financial data of listed companies were mainly taken from Xenophon database and GuoTaian database. The marketization index data were obtained from The Marketization Index in China: 2011 Report for the Relative Marketization Process in Various Regions. Industries was classified according to the Global Industry Classification Standard (GICS) and test the sensitivity of the capital structure to exogenous corporate tax rate change in different industries. The empirical results show that: firstly, the higher the degree of marketization is, the more significant the tax shield effect is; secondly, compared to the corporate income tax, differences in the degree of marketization exert a more significant effect on the corporate capital structure; thirdly, because of the long existence of tax incentives, debt tax shield is not significant in people’s livelihood industries and information technology industry; Fourthly, given the upward trend in the overall asset-liability ratio of Chinese companies, in order to control companies’ financial risk, we recommend to foster market reform and the use corporate income tax incentives where necessary. The results of research will provide a reference for future marketization reform and tax policies in different industries in China.