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Open AccessArticle

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

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Department of Finance, College of Finance, Feng Chia University, Taichung City 40724, Taiwan
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Department of Accounting and Finance, Nha Trang University, Nha Trang 57000, Vietnam
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Department of Accounting, Thai Nguyen University of Economics and Business Administration, Thai Nguyen 24000, Vietnam
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Department of Economics and Tourism, Kien Giang University, Kien Giang 91000, Vietnam
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Department of Finance, College of Management, Asia University, Wufeng, Taichung City 41354, Taiwan
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Author to whom correspondence should be addressed.
Sustainability 2020, 12(9), 3883; https://doi.org/10.3390/su12093883
Received: 6 April 2020 / Revised: 29 April 2020 / Accepted: 2 May 2020 / Published: 9 May 2020
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. View Full-Text
Keywords: Chinese manufacturing firms; capital structure; pecking order theory; trade-off theory; quantile regression Chinese manufacturing firms; capital structure; pecking order theory; trade-off theory; quantile regression
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Nguyen, H.M.; Vuong, T.H.G.; Nguyen, T.H.; Wu, Y.-C.; Wong, W.-K. Sustainability of Both Pecking Order and Trade-Off Theories in Chinese Manufacturing Firms. Sustainability 2020, 12, 3883.

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