Articlediamond2018

Does information asymmetry lead to higher debt financing? Evidence from China during the NTS Reform period

Wenzhou Qu · Udomsak Wongchoti · Fei Wu · Yanming Chen

30 citations0/0 files storedJournal of Asian Business and Economic Studies

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Purpose The purpose of this paper is to test an implication of the pecking order theory to explain capital structure decisions among Chinese listed companies during the 2005-2007 NTS Reform transition period. Design/methodology/approach The authors utilize direct proxies for information asymmetry based on microstructure models including Probability of the arrival of informed trades (PIN), Adverse selection component of the bid-ask spread (λ), Illiquidity ratio (ILLIQ) and liquidity ratio, and Information asymmetry index (InfoAsy) to examine their relation with firms’ debt financing. Findings Consistent with the prediction of Pecking Order Theory, the authors find that companies for which stock investors are challenged with more severe informational disadvantages are associated with higher degree of leverage use. Originality/value The study provides a more direct test on the positive relation between information asymmetry and financial leverage of Chinese firms. In contrast to previous findings by Chen (2004), the results suggest that capital structure choices among Chinese firms progressively conform to conventional finance theories (e.g. Pecking Order Theory) with the decline of non-tradable shares.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 2002Illiquidity and stock returns: cross-section and time-series effects 1985Continuous Auctions and Insider Trading 1984The Capital Structure Puzzle 1995What Do We Know about Capital Structure? Some Evidence from International Data 1980On the Impossibility of Informationally Efficient Markets 1980On the Impossibility of Informationally Efficient Markets 1984The Capital Structure Puzzle

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