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Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies

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Author Info
Guanqun Tong
Christopher J. Green

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Abstract

This study tests the pecking order and trade-off hypotheses of corporate financing decisions using a cross-section of the largest Chinese listed companies. The study is built on Allen (1993), Baskin (1989) and Adedeji (1998) to set up three models in which trade-off and pecking order theories give distinctively different predictions: (1) the determinants of leverage; (2) the relationship between leverage and dividends; and (3) the determinants of corporate investment. In model 1, a significant negative correlation is found between leverage and profitability; in model 2 a significant positive correlation between current leverage and past dividends is found. These results broadly support the pecking order hypothesis over trade-off theory. However, model 3 is inconclusive. Overall, the results provide tentative support for the pecking order hypothesis and demonstrate that a conventional model of corporate capital structure can explain the financing behaviour of Chinese companies.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 19 (October)
Pages: 2179-2189
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Handle: RePEc:taf:applec:v:37:y:2005:i:19:p:2179-2189

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Abimbola Adedeji, 1998. "Does the Pecking Order Hypothesis Explain the Dividend Payout Ratios of Firms in the UK?," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 25(9-10), pages 1127-1155. [Downloadable!] (restricted)
  2. Wiwattanakantang, Yupana, 1999. "An empirical study on the determinants of the capital structure of Thai firms," Pacific-Basin Finance Journal, Elsevier, vol. 7(3-4), pages 371-403, August. [Downloadable!] (restricted)
  3. Cobham, David & Subramaniam, Ramesh, 1998. "Corporate finance in developing countries: New evidence for India," World Development, Elsevier, vol. 26(6), pages 1033-1047, June. [Downloadable!] (restricted)
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  4. Colombo, Emilio, 2001. "Determinants of Corporate Capital Structure: Evidence from Hungarian Firms," Applied Economics, Taylor and Francis Journals, vol. 33(13), pages 1689-1701, October. [Downloadable!] (restricted)
  5. Booth, L. & Asli Demirgu-Kunt, V.A. & Maksimovic, V., 1999. "Capital Structure in Developing Countries," Rotman School of Management - Finance 00-001, Rotman School of Management, University of Toronto.
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  6. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March. [Downloadable!] (restricted)
  8. Singh, A. & Hamid, J., 1992. "Corporate Financial Structure in Developing Countries," Papers 1, World Bank - International Finance Corporation.
  9. Singh, A., 1995. "Corporate Financial Patterns in Industrializing Economies. A Coparative International Study," Papers 2, World Bank - International Finance Corporation.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Prasetyantoko, Agustinus, 2008. "Financing Policies and Firm Vulnerability in Indonesia," MPRA Paper 6533, University Library of Munich, Germany. [Downloadable!]
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