Studies on the capital structure of Asian corporations are rare, and most of those studies support different explanations of financing decisions compared to the ones accepted for the USA and Europe. We test relationships that are typical of the Tradeoff Theory and the Pecking Order Theory, and analyze the speed of adjustment toward target capital structures for 1239 companies with capitalizations of more than US$1 billion listed on 11 Asian stock exchanges and belonging to eight industrial sectors. Our results are based on generalized method of moments (GMM) estimations for the determinants of capital structures and system-GMM estimations for the speed of adjustment, and robustness is checked using book leverage and market leverage on the basis of ordinary least squares estimations and two-stage least squares estimations. We contribute to the literature by finding strong evidence that companies in Asia pursue target capital structures, as predicted by the Tradeoff Theory. Only in one respect does the Pecking Order Theory demonstrate superior explanatory power. We further show that the convergence to target capital structures is consistent with international evidence, estimated at an annual adjustment speed of 24-45% of original leverage levels. Finally, our comparison among eight industries shows that the capital structure choice in Asia is influenced by fixed effects.

According to F. A. Hayek, Keynes' General Theory neglects an analysis of the production structure. As a contribution to this research gap, we look at companies' decisions to finance investments and at their agility to adjust their capital structure. We thus study the relationship between capital structure to finance corporate production and shifts in aggregate demand. Target capital structure determinants and speeds of adjustment to these target capital structures will be analyzed for a geographically comprehensive sample of 2,706 companies listed in Asia, Europe and the U.S.A. in the period 1995 -2009. Aggregate demand turns out to be the coordinating force which determines managers' choices of target capital structures. The speed of adjustments towards target capital structures indicate that firms are agile in adapting to their targets. Our results provide evidence on Keynes' General Theory from a firm level perspective: Firms respond quickly to shifts in aggregate demand by adjusting capital and production structure correspondingly.