Toward an Empirical Investigation of the Pecking Order Theory: Evidence from Chinese Listed Firms

The financing method of Chinese listed firms has been studied for a long time, but with inconclusive indications. This paper thus adopts Chinese listed firms’ data from 2003 to 2015 to investigate the pecking order theory by testing the relationship between financing deficit and long-term debt to capital ratio. The empirical analysis documents a positive relationship between financing deficit and changes in the long-term debt ratio, which indicates, to some extent, that the pecking order theory is justified in these firms. Moreover, we find that the market timing effect exudes a substantial negative impact on the pecking order theory, resulting in the listed firms having a considerable incentive to use equity financing when their market value is high. Furthermore, the dynamics of the state ownership structure of Chinese firms adheres to the pecking order theory, suggesting that state-owned enterprises (SOEs) prefer to use long-term debt financing. Finally, the ownership concentration ratio also verifies the pecking order theory, implying that controlling shareholders’ preferred financing method is long-term debt. In general, our empirical analysis shows that stock market performance has a strong impact on capital structure, SOEs have easier access to long-term debt financing, and Chinese listed firms with greater concentrated ownership structure are more prone to use long-term debt.