Profit and Financing Choice: An Empirical Comparison on the Basis of Traditional Empirical Model and Debt-Equity Multi-model

In the research of relationship between enterprise profit and financing choice, the existing literatures mainly focus on the regression analysis using leverage ratio as the proxy of capital structure. This paper asserts that the dual effect of debt-equity financing has been incorporated into leverage ratio; therefore, regression analysis merely on leverage ratio fails to uncover the financing choice of enterprise. This article examines whether the financing behavior of listed company in China is consistent with the static trade-off theory using traditional empirical model with data of 619 listed companies in the Shanghai and Shenzhen stock exchange from 1998 to 2007. Under the guideline of static trade-off theory, a new empirical model called debt-equity financing multi-model has been deduced, with which we examine the impact that firm profit casts upon financing behavior of listed company in China.