Dynamic financial decisions with varying degrees of information asymmetry and profitability

Much research has been conducted on the accuracy of the pecking order theory and the trade-off theory. Neither theory on its own has seemed to hold sufficient explanatory power to accurately describe capital structures. Chou et al. [Sun Yat-Sen Management Review, 19, 225-227 (2011)] proposed the signal factor hypothesis (SFH) which encompasses and integrates the two theories. Using hierarchical linear modeling (HLM), we verified the predictions of the SFH, proving that companies from Taiwan and China with low information symmetry have higher debt ratios than those with high information symmetry, and that profitability has a negative influence on capital structure regardless of the degree of the information asymmetry.