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Abstract

Numerous empirical studies in the finance field have tested many theories for firms¡¦ capital structure. Under the assumption of asymmetric information, the pecking order theory proposes the financing order for farm businesses, which implies a negative relationship between their cash flow and leverage. Meanwhile, the signaling theory suggests a farms' financing strategy, meaning high quality farms prefer to facilitate their capital rising by sending diverse signals to potential lenders. Could these capital structure theories be applied for farm businesses? This paper tests the applicability of the pecking order theory and the signaling theory for farm businesses. The results show that farm businesses not only follow the pecking order theory but also the signaling theory. In addition, unlike corporate firms who can choose high leverage as financing signals, farm businesses mainly depend on their large size and good historical operation records to facilitate investment financing.

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