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Abstract
This chapter proposes a Bayesian approach based on structural equation modeling (SEM) to empirically test the determinants of capital structure choice for the Chinese listed companies. The chapter investigates major unobservable theoretical attributes identified by capital structure theories and constructs proxies for these attributes considering specific institutional settings in China. The findings suggest that some firm-specific factors relevant to explaining capital structure in developed economies are also related to the Chinese economy. Unique determinants of capital structure choice for Chinese listed companies are also identified, which are closely related to the special micro and macroeconomic situations in China.
Keywords: capital structure; chinese listed companies; structural equation modeling
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1. Introduction
As one of the most important areas in corporate finance, capital structure analysis has attracted significant attention in the literature. Modigliani and Miller (1958) proposed an M-M theory stating that the capital structure does not affect firms' value in the perfect capital market, which is a very restrictive assumption. Since then, many efforts have been made to relax the assumptions of the M-M theory. The development of agency theory (Jensen and Mecking, 1976), coupled with thorough research of bankruptcy costs, suggested that corporations act as if there is a unique, optimal capital structure. The main competing theories in explaining firms' capital structure choice are the static trade-off hypothesis (Kraus and Litzenberger, 1973) and the pecking order hypothesis (Myers and Majluf, 1984). Static trade-off models assume the optimal capital structure does exist, while the pecking order hypothesis states that there is no well-defined target debt ratio based on the information asymmetry. Diverse signaling models have also been proposed to address the asymmetric information problems (Ross, 1977).
Over the past several decades, numerous researches have been conducted to investigate the determinants of capital structure choice. Bradley et al. (1984) adopted cross-sectional, firm-specific data to test for the existence of an optimal capital structure by considering some influential factors. Titman and Wessels (1988) analyzed the impact of unobservable attributes on the choice of corporate leverages based on a factor-analytic technique. Homaifar et al. (1994) applied a general autoregressive distributed lag model to the US data to estimate the long-run steady state determinants of firms' capital structure. Rajan and Zingales (1995) compared the...