capital structure
African Journal of Business Management Vol. 5(15), pp. 6527-6540, 4 August, 2011
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.1012
ISSN 1993-8233 ©2011 Academic Journals
Full Length Research Paper
Capital structure and financing decision - Evidence from the four Asian Tigers and Japan
Kuang-Hua Hsu1* and Ching-Yu Hsu2
1
Department of Finance, Chaoyang University of Technology, Taiwan, Republic of China 168 Jifong E. Road., Wufong
District, Taichung City 41349, Taiwan, Republic of China.
2
Department of Finance, National Taiwan University, Taiwan, R. O. C, No.1 Sec. 4, Roosevelt Road, Taipei, 10617,
Taiwan, Republic of China.
Accepted 14 June, 2011
This paper examines the relative importance of the Modigliani-Miller theorem, the trade-off theory, the pecking order theory and the market timing theory in the financing decisions of the firms for the Four
Asian Tigers (Hong Kong, Korea, Singapore and Taiwan) and Japan. According to our findings, although several elements impact on capital structure temporarily, firms from all countries rebalance their leverage following equity issuances. The results are more in line with the dynamic trade-off theory rather than the equity market timing or pecking order hypothesis of capital structure. In other words, firms have their target capital structures, determined by the marginal benefits of debt and costs associated with debt. Therefore, this implies that firms adjust their capital structure in response to the temporary shocks that cause their leverage to deviate from the target in the Four Asian Tigers and
Japan. This outcome would be consistent with the previous empirical evidences of the US and the other of the Group of Seven (G7).
Key words: Capital structure, trade-off theory, market timing hypothesis, pecking order theory.
INTRODUCTION
The capital structure refers to the way that a firm finances its assets through some combination of financing
sources.
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.1012
ISSN 1993-8233 ©2011 Academic Journals
Full Length Research Paper
Capital structure and financing decision - Evidence from the four Asian Tigers and Japan
Kuang-Hua Hsu1* and Ching-Yu Hsu2
1
Department of Finance, Chaoyang University of Technology, Taiwan, Republic of China 168 Jifong E. Road., Wufong
District, Taichung City 41349, Taiwan, Republic of China.
2
Department of Finance, National Taiwan University, Taiwan, R. O. C, No.1 Sec. 4, Roosevelt Road, Taipei, 10617,
Taiwan, Republic of China.
Accepted 14 June, 2011
This paper examines the relative importance of the Modigliani-Miller theorem, the trade-off theory, the pecking order theory and the market timing theory in the financing decisions of the firms for the Four
Asian Tigers (Hong Kong, Korea, Singapore and Taiwan) and Japan. According to our findings, although several elements impact on capital structure temporarily, firms from all countries rebalance their leverage following equity issuances. The results are more in line with the dynamic trade-off theory rather than the equity market timing or pecking order hypothesis of capital structure. In other words, firms have their target capital structures, determined by the marginal benefits of debt and costs associated with debt. Therefore, this implies that firms adjust their capital structure in response to the temporary shocks that cause their leverage to deviate from the target in the Four Asian Tigers and
Japan. This outcome would be consistent with the previous empirical evidences of the US and the other of the Group of Seven (G7).
Key words: Capital structure, trade-off theory, market timing hypothesis, pecking order theory.
INTRODUCTION
The capital structure refers to the way that a firm finances its assets through some combination of financing
sources.