Capital structure and financing decision - Evidence from the four Asian Tigers and Japan

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).