Abstract
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.
Highlights
Capital structure has attracted much attention from academics and practitioners in corporate financial management
Frank and Goyal [43] examined the factors affecting the capital structure decisions of listed US firms during the period 1950–2003 and showed that the industry average leverage ratio, tangible fixed assets, firm size, and expected inflation were positively correlated with leverage, while the profitability and market-to-book asset ratios were negatively correlated with leverage
This implied that given high market leverage, Chinese manufacturing firms must consider the trade-off in following trade-off theory (TOT) when confronted with high debt and increasing financial distress costs
Summary
Capital structure has attracted much attention from academics and practitioners in corporate financial management. Previous studies on the capital structure of Chinese firms only consider the influence of independent variables on debt leverage (Chen [11]; Huang [12]; Ni and Yu [13]; Li, Yue, and Zhao [14]; Tse and Rodgers [15]; Zhou and Xie [16]). All of these studies used ordinary least squares (OLS)/Panel regression methodology. Our study analyzes the framework of POT and TOT to consider the corporate debt leverage decisions of the manufacturing industry of China and to consider the interactions of two important variables—debt leverage and investment.
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