Sustainability of Both Pecking Order and Trade-Off Theories in Chinese Manufacturing Firms

Huu Manh Nguyen, Thi Huong Giang Vuong, Thi Huong Nguyen, Yang-Che Wu and Wing-Keung Wong
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Huu Manh Nguyen: Department of Finance, College of Finance, Feng Chia University, Taichung City 40724, Taiwan
Thi Huong Giang Vuong: Department of Finance, College of Finance, Feng Chia University, Taichung City 40724, Taiwan
Thi Huong Nguyen: Department of Economics and Tourism, Kien Giang University, Kien Giang 91000, Vietnam
Yang-Che Wu: Department of Finance, College of Finance, Feng Chia University, Taichung City 40724, Taiwan

Sustainability, 2020, vol. 12, issue 9, 1-25

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.

Keywords: Chinese manufacturing firms; capital structure; pecking order theory; trade-off theory; quantile regression (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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