| Summary: | 碩士 === 國立臺灣大學 === 經濟學研究所 === 93 === Hypotheses on firms’ capital structure include: (1) Firms have an optimal capital structure, (2) Firms’ financing decision follows a pecking order, (3) Firms time the equity issuing, and (4) Changes in firms’ capital structure in terms of book value of debt over market value of equity simply reflect the changes in equity price. In the trade-off model, firms will identify their optimal leverage by weighing the costs and benefits of an additional dollar of debt. Myers (1984) develops an alternative theory known as the pecking order model of financing decisions. Under informational asymmetries, firms finance new investments first with retained earnings, then with safe debt, then with risky debt, and finally with equity. Baker and Jeffrey (2002) found that low leverage firms are those that raised funds when their market valuations were high, as measured by the market-to-book ratio, while high leverage firms are those that raised funds when their market valuations were low. In other words, market timing phenomenon can explain well on capital structure. However, Welch (2004) provided evidence that the determinant of debt ratios are stock returns. Changes in firms’ capital structure in terms of book value of debt over market value of equity simply reflect the changes in equity price.
A Two-stage Probit Switching Regression model is used to examine whether investing in China has impacts on firms’ determination of capital structure or not. The empirical results provided evidence that does not support the static trade-off model, pecking order theory, and market timing phenomenon. We find that stock returns are a major determinant of debt ratios in Taiwan. In other words, our findings in debt ratio dynamics are in accordance with those of Welch (2004).
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