Title: Capital structure mean reversion: a comparison between Chinese state-owned and private firms

Authors: Tanveer Ahsan; Abdur Rub

Addresses: School of Accounting, Dongbei University of Finance and Economics, Dalian, China ' Management Systems International, Islamabad, Pakistan

Abstract: The study follows mean reversion approach and applies different panel unit root tests on a balanced data-set of 8,670 firm-year observations of Chinese non-financial firms, spread over ten years (2003-2012). The objective of the study is to investigate whether the leverage behaviour of Chinese non-financial firms is mean reverting and consequently, to decide between two competing theoretic frameworks (trade-off theory, pecking order theory). Overall panel test results for short term, long term and total leverage support trade-off financing behaviour. Further, the study categorises firms into state-owned and private firms and compares the leverage behaviour of two categories. The results of comparative analysis explain that leverage behaviour of both types of the firms (state-owned firms, private firms) is mean reverting and therefore supports trade-off theory of capital structure. Our study indicates that both types of the Chinese firms (state-owned firms, private firms) follow long-term financing strategy that is very important for the firms operating in an emerging economy.

Keywords: trade-off theory; TOT; pecking order theory; POT; mean reversion; China; unit root test; panel data; capital structure.

DOI: 10.1504/GBER.2017.10003566

Global Business and Economics Review, 2017 Vol.19 No.6, pp.687 - 695

Received: 22 Nov 2015
Accepted: 22 Feb 2016

Published online: 12 Oct 2017 *

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