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


  • Guanqun Tong
  • Christopher Green


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.

Suggested Citation

  • Guanqun Tong & Christopher Green, 2005. "Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies," Applied Economics, Taylor & Francis Journals, vol. 37(19), pages 2179-2189.
  • Handle: RePEc:taf:applec:v:37:y:2005:i:19:p:2179-2189
    DOI: 10.1080/00036840500319873

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    References listed on IDEAS

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    Cited by:

    1. Huyghebaert, Nancy & Quan, Qi & Sun, Lijian, 2014. "Financing decisions after partial privatization in China: Can a stock market quotation really provide discipline?," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 27-46.
    2. Prasetyantoko, Agustinus, 2008. "Financing Policies and Firm Vulnerability in Indonesia," MPRA Paper 6533, University Library of Munich, Germany.
    3. repec:eee:ecmode:v:64:y:2017:i:c:p:288-294 is not listed on IDEAS
    4. Jun Jiang & Komain Jiranyakul, 2013. "Capital Structure, Cost of Debt and Dividend Payout of Firms in New York and Shanghai Stock Exchanges," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 113-121.
    5. Abdou, Hussein A. & Pointon, John & El-Masry, Ahmed & Olugbode, Moji & Lister, Roger J., 2012. "A variable impact neural network analysis of dividend policies and share prices of transportation and related companies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 796-813.
    6. Abdallah Atieh & Simon Hussain, 2008. "Disaggregating 'accounting earnings' to better explain UK dividends," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(6), pages 399-401.
    7. repec:ami:journl:v:17:y:2018:i:1:p:100-121 is not listed on IDEAS
    8. Chang, Chun & Chen, Xin & Liao, Guanmin, 2014. "What are the reliably important determinants of capital structure in china?," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 87-113.
    9. Cziráki, Péter, 2007. "A tőkestruktúra empirikus vizsgálata a magyar és az osztrák tőzsdén jegyzett vállalatok körében
      [An empirical investigation of the capital structure of Austrian and Hungarian listed companies]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 703-715.
    10. Rui Zhang & Xun Zhang, 2016. "Capital Structure Premium in Multinational SOEs: Evidence from China," Review of Development Economics, Wiley Blackwell, vol. 20(1), pages 283-293, February.
    11. Ibrahimo, M.V. & Barros, C.P., 2009. "Relevance or irrelevance of capital structure?," Economic Modelling, Elsevier, vol. 26(2), pages 473-479, March.
    12. Imran Yousaf & Arshad Hassan, 2016. "Effect of Family Control on Corporate Financing Decisions: A Case of Pakistan," PIDE-Working Papers 2016:138, Pakistan Institute of Development Economics.
    13. Hongfei Zhu, 2009. "The Relationship Between Investment and Fund Raising: An Empirical study to Japanese Manufacturing Firms," Economics Bulletin, AccessEcon, vol. 29(1), pages 357-367.
    14. Muhammad Azeem Qureshi, 2009. "Does pecking order theory explain leverage behaviour in Pakistan?," Applied Financial Economics, Taylor & Francis Journals, vol. 19(17), pages 1365-1370.
    15. Abdallah Atieh & Simon Hussain, 2012. "Accounting data and UK dividends," Journal of Applied Accounting Research, Emerald Group Publishing, vol. 13(1), pages 56-70, May.
    16. TAHA Roshaiza & SANUSI Nur Azura, 2014. "Overview Of Capital Structure Theory," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 9(2), pages 108-116, August.
    17. Darwin Yu & Rodolfo Aquino, 2009. "Testing capital structure models on Philippine listed firms," Applied Economics, Taylor & Francis Journals, vol. 41(15), pages 1973-1990.
    18. Suzan Hol & Nico Van der Wijst, 2008. "The financial structure of nonlisted firms," Applied Financial Economics, Taylor & Francis Journals, vol. 18(7), pages 559-568.
    19. repec:taf:oaefxx:v:5:y:2017:i:1:p:1339770 is not listed on IDEAS
    20. Víctor M. González & Francisco González, 2011. "Firm size and capital structure: Evidence using dynamic panel data," Post-Print hal-00730234, HAL.
    21. repec:brc:brccej:v:2:y:2017:i:4:p:69-83 is not listed on IDEAS
    22. Nadeem Ahmed Sheikh & Muhammad Azeem Qureshi, 2014. "Crowding-out or shying-away: impact of corporate income tax on capital structure choice of firms in Pakistan," Applied Financial Economics, Taylor & Francis Journals, vol. 24(19), pages 1249-1260, October.
    23. Nadeem Ahmed Sheikh & Zongjun Wang, 2011. "Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan," Managerial Finance, Emerald Group Publishing, vol. 37(2), pages 117-133, January.
    24. Attaullah Shah & Jasir Ilyas, 2014. "Is Negative Profitability-Leverage Relation the only Support for the Pecking Order Theory in Case of Pakistani Firms?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(1), pages 33-55.

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