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

• Published in: Journal of Asian Business and Economic Studies 2018-07, Vol.25 (1), p.109-121
• Main Authors: Qu, Wenzhou, Wongchoti, Udomsak, Wu, Fei, Chen, Yanming
• Format: Article
• Language: English
• Subjects: Adverse selection; asymmetric information; Asymmetry; Capital markets; Capital structure; chinese market nts reform; Debt financing; Equity; g15; g32; Investments; Investors; Long term debt; pecking order; Securities markets; Stock exchanges
• ISSN: 2515-964X; 2515-964X
• DOI: 10.1108/JABES-04-2018-0006

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.