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Examining the theory of capital structure: signal factor hypothesis

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  • Ginny Ju-Ann Yang
  • Horace Chueh
  • Chen-Hsun Lee

Abstract

The aim of this study was to explore how various levels of information asymmetry affect the capital structure of listed companies in Taiwan and China. Regression results over the past few decades have indicated that the trade-off theory lacks explanatory power, bringing into question the accuracy of the static trade-off theory and the existence of an optimal capital structure. On the other hand, the financial decisions of companies do not always appear consistent with the pecking order theory. Building on the research of Chou et al. (2011), this study sought to verify the signal factor hypothesis, which combines the trade-off theory with the pecking order theory.This study was the first one to employ the panel KPSS test with sharp drifts, developed by Chang and Ranjbar (2012), as well as the Fourier function to verify that an optimal capital structure does exist for companies with more symmetric information, thereby establishing the trade-off theory. Firms with information asymmetry show adverse selection costs, which supports the pecking order theory and rejects the existence of an optimal capital structure.

Suggested Citation

  • Ginny Ju-Ann Yang & Horace Chueh & Chen-Hsun Lee, 2014. "Examining the theory of capital structure: signal factor hypothesis," Applied Economics, Taylor & Francis Journals, vol. 46(10), pages 1127-1133, April.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:10:p:1127-1133
    DOI: 10.1080/00036846.2013.864040
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    Cited by:

    1. Tiago Cardao-Pito, 2017. "Organizations as Producers of Operating Product Flows to Members of Society," SAGE Open, , vol. 7(3), pages 21582440177, August.
    2. Filiz Bozagaç & Ömür Saltık & Mert Aktaş & Süleyman Değirmen, 2024. "A New Era of Capital Structure Choices in Technology Firms: Insights on Cultural Dimensions," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 69(69), pages 15-32, June.
    3. Aysegul ERTUGRUL, 2023. "Investigation of the Relationship between Corporate Governance and Capital Structure in Insurance Companies with Panel Regression Analysis," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 17(1), pages 107-130.
    4. Maria Elena Bontempi & Laura Bottazzi & Roberto Golinelli, 2015. "ynamic corporate capital structure behavior:empirical assessment in the light of heterogeneity and non stationarity," Working Papers 537, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. Edgardo Bucciarelli & Nicola Mattoscio, 2021. "Reconsidering Herbert A. Simon’s Major Themes in Economics: Towards an Experimentally Grounded Capital Structure Theory Drawing from His Methodological Conjectures," Computational Economics, Springer;Society for Computational Economics, vol. 57(3), pages 799-823, March.
    6. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    7. Chen Hsun Lee & Yung-Hsiang Ying & Koyin Chang, 2016. "Dynamic Financial Decisions with Varying Degrees of Information Asymmetry and Profitability," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-9, March.

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