The Pecking Order Of Listed Companies In China

In the early 1960s , professor Gordon Donaldson observed that there is a "pecking order" of financing , not the balanced approach that would result if the MM tradeoff models accurately described real world behavior . Professor Stewart Myers noted the inconsistency between Donaldson' s findings and the tradeoff models , and that inconsistency led Myers to propose the asymmetric information theory of capital structure .The fund-raising environment in China is changing .Companies have the capital structure which is the mixture of debt and equity financing. Based on the western finance theory already existing and also based on the descriptive studies /this article finds that the pecking order of listed firms in China is inconsistent with the classical pecking order theory: Firms prefer to finance with internally generated funds if that wouldn' t damage their chances to issue new stock; they avoid cash dividend ;if they have opportunities to issue new common stock ,they will issue it no matter whether internal cash flow is sufficient or not . The most important goal of going to stock exchange is to get money:The reason for the inconsistency is that existing cash cost and risk of issuing common stock is much lower than issuing debt . In the eyes of investors ,the cash dividends gain is very low, they have to and then like to depend on the capital gain. Most stakeholders hope for thestock price to rise sharply .It is rational for listed firms to prefer to issuing common stocks .because they have to seek the lowest cost of financing to survive .But the distorted pecking order has many bad results .The government should enact strict laws to regulate the stock markets , should educate investors , should make the cash cost of common stock higher than debt ; listed firms ought to abide by laws and moral obligations ;investors must educate themselves.Only if the government , investors and listed companies cooperate to create a scientific, normative and rational financing environment, the pecking order of listed companies in China could follow the classical pecking order theory eventually.