Determinants of Capital Structure of Chinese Manufacturing Firms: A Panel Regression Analysis

The research objectives of this paper is to whether firm specific variables affect capital structure decision and respond to the selected capital structure determining factors of Chinese manufacturing firms. Seven years' data from year 2004-2010 has been taken for analysis; a total sample of 196 Chinese firms from manufacturing industries Food, Fuel & Power, Pharmaceuticals and chemicals, and Textile. A static balanced panel data regression model was used for analysis. The result of the model based on the Total Debt Ratio shows that Profitability, Liquidity and tax burden is significant at 5 percent level and inversely related to debt financing for Chinese firms which complies with the Pecking order theory. Firm's Size variable is positively associated for Chinese firms which comply with Trade-off theory. Operating risk is significant and positively associated for Chinese companies which is absolutely opposite of Trade-off theory. Industry dummy is found insignificant which indicates industries have no significant difference in their capital structure. Besides, this research also highlights the diverse impact of the capital structure determining factors in firm's overall leverage decision and in long term debt financing decision.