The Capital Structure Through the Trade-Off Theory: Evidence from Chinese Firm

DOI

10.2991/978-94-6463-054-1_50How to use a DOI?

Keywords

Capital structure; Trade-off theory; Agency and agency conflicts; Bancruptcy cost; Modigliani and Miller Theory

Abstract

For a long time, studying financial structure has been a crucial and essential issue in the finance industry. The major goal of this study is to use the Trade-Off Theory to identify the capital structure of Chinese firms. This paper analyzes the determinants of capital structure of Chinese Firms through the existence of dynamic and non existence which is an adjustment to target leverage ratio. This validation leads to test two complementary successive models, the first is a static, while the second is a dynamic model that incorporates transaction costs variable to see how we can talk about a speed adjustment allowing firms to get closer to the target ratio. The results of the first model show that the profitability and asset structure are the main explanatory variables of the level of leverage of Chinese firms. While for the dynamic model, the most remarkable result is manifested at the level of the adjustment costs that are relatively high which engendered a slow adjustment towards the optimal ratio. This paper assesses 20 Chinese top listed firms in the stock exchange data between 2010 to 2021. Panel data analysis was examined and auto-correlation using the reviews and model developed. Findings show the positive correlation between capital structure and debt financing with its variable. Low but positive correlation is in line with trade-off theory and leverage level. This research is significant to managers, and shareholders since it helps them in making viable investment decision and the right mix of capital for effective operations of the firm.

Copyright

© 2023 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Xinyu Deng
PY  - 2022
DA  - 2022/12/14
TI  - The Capital Structure Through the Trade-Off Theory: Evidence from Chinese Firm
BT  - Proceedings of the 2022 2nd International Conference on Financial Management and Economic Transition (FMET 2022)
PB  - Atlantis Press
SP  - 461
EP  - 473
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-054-1_50
DO  - 10.2991/978-94-6463-054-1_50
ID  - Deng2022
ER  -