Testing the Pecking Order Theory and Trade-Off Theory of Capital Structure

This paper tests traditional capital structure models against the alternative of a pecking order model of corporate finance in Chinese stock market. We show that, the basic pecking order model, which predicts external debt financing driven by the internal financial deficit, has much greater explanatory power over the capital structure of Chinese listed companies than a static trade-off model. However, the trade-off model has greater explanatory power in explaining the debt maturity structure of firms.