Panel data analyses of the pecking order theory and the market timing theory of capital structure in Taiwan

We exploit panel data of publicly-traded Taiwanese firms to test the pecking order theory the market timing theory over 1990–2005. On the one hand, the results indicate no support for pecking order behavior (consistent with Frank & Goyal, 2003), as net equity issues track the financing deficit much more closely than net debt issues do. The adverse selection also demonstrates that the pecking order theory is not supported by our empirical results. On the other hand, the evidence of the market timing theory is favorable for the Taiwan stock market especially for the period 1990 to 2001, suggesting that the results of this theory provide an explanation when our results do not support the pecking order hypothesis. However, the market timing theory does not apply in the period of 2002–2005. In other words, firms in Taiwan prefer issuing more debt rather than equity under low market performance.