Testing static trade-off against pecking order models of capital structure - A case of manufacturing companies listed on Ho Chi Minh stock exchange (HOSE)
Abstract
This paper is a contribution towards understanding the capital structure behavior of manufacturing companies listed on Ho Chi Minh Stock Exchange in Vietnam between2011 and 2015. In particular, the research conducts an empirical test for the two leading but conflicting theories of capital structure namely pecking order theory and static trade-off theory by examining their two representative models including pecking order model and target adjustment model respectively, based on Shyam-Sunder and Myers (1999) approach. According to that examination, this research aims to find which of the two theories can provide a better explanation for the capital structure decision of sample companies. The finding suggests that the explanatory power of static trade-off theory surpasses that of pecking order theory, indicating that it might be the target optimal debt level having more significant influence on changes in debt level rather than the internal fund deficit. Additionally, there are two more models employed in this paper namely combination model and conventional regression model. The purpose of the former is verifying the predictability of the two theories, and that of the latter is overcoming the target adjustment model’s shortcomings and identifying determinants of leverage toward tested corporations. Besides, the quantitative research method associated with the panel data is employed in this study.