Pecking Order Theory

Factors influencing capital structure of a firm is a debatable issue which has engaged academicians for decades. Several theories have been put forward on this subject, after the landmark studies of Modigliani and Miller (1958, 1963) that established capital structure irrelevance and tax shield advantages. Amongst the several theories advanced to explain capital structure of firms, there are three major theories in the Corporate Finance literature, namely, Trade‐off theory, Agency Cost theory and Pecking‐Order theory that highlight different determinants of corporate capital structure. In an attempt to study the determinants of capital structure in Indian scenario and to verify whether any of the above mentioned theories can characterize the Indian corporate financing, this paper makes an empirical study of the capital financing pattern of 300 private sector Indian firms for the period 1999‐2008, the period of unprecedented growth of Indian economy. The study finds out that financin...

Capital structure as the most important and effective parameter on the orientation and valuation of the firm in the capital markets has been considered. Given the lack of comprehensive research and case study in this field, the aim of this research is the determination of the dominant pattern of the capital structure in automotive and parts industry. The research period was 2006-2016 and in the mentioned industry, 26 companies were selected as statistical sample. The pooled/paned regression models were applied to analyze the research data in econometric software Eviews 9. In the study, such criteria as book leverage (LEV1), market leverage (LEV2), and long-term leverage (LEV3) were applied to determine the capital structure. Likewise, such variables as DPS to EPS (DPO), return on equity (ROE), business risk (BR), asset structure (TANG), liquidity (LIQ), market to book value (MB), company size (SIZE), non debt tax saving (NDTS), tangible assets to debt ratio (TADR), debt tax shelter (DTS), and interest coverage (IC) were exerted to measure the effective factors on capital structure based on different theories. Findings indicate that in the automotive and parts industry, pecking order, extreme management optimism, and market timing theories have been the dominant patterns in Iranian capital.

Our aim is to test if the leverage and the debt maturity of Chilean firms quoted in the stock market are related with their growth opportunities, their ownership structure and the environment in which they operate. We perform an empirical analysis over an unbalanced panel of 169 Chilean firms for the period 1990-2001. Chilean firms growth opportunities are financed with long term debt. However, when firms need external funds they finance their growth opportunities with short term debt. The high ownership concentration, characteristic of Chilean firms, along with the presence of growth opportunities favours debt financing. The largest firms and the more needed of external financing prefer longer maturities for their debt. Finally, our results indicate that the presence of internal capital markets within a group influences firms financing decisions, particularly in those firms within the group with financing deficit. Pecking order theory offers partial explanations of Chilean firms fi...

The current study examines the impact of capital structure on firm profitability, with an emphasis on Pakistani textile sector firms listed on PSX. Firm profitability is calculated by ROA, and capital structure is measured by three proxies: leverage1 (long term debt to long-term fund ratio), leverage2 (debt to equity ratio), and leverage3 (debt to total asset ratio). The Generalized Method of Moments was used to estimate the capital structure-performance relationship. Both leverage1 and leverage2 are positively linked to firm profitability. These results back up the pecking order theory. Leverage3, on the other hand, is inversely related to profitability. The findings present an interesting view and provide useful insight into the capital structure-profitability relationship for the managers and policy makers.

The success of construction contractors largely depends on the specific terms and the availability of sufficient funds for realizing planned projects. Financial issues in construction have been discussed since mid 1970s, yet no consensus about progress has been reached in the construction finance literature. A systematic analysis of 259 finance related studies in construction is undertaken to identify research trends, critical topics, and performance of journals and authors. To map the productivity in construction finance field, Scopus database was searched for the entire period for which this database provides online coverage. Results reveal that “financial health” category, in particular one group of studies aiming to monitor and assess the financial performance of construction organizations for broader strategic issues pervaded the construction finance research. However, notably the “identification of capital structure, determinants and financing instruments” category received le...

In this paper, the strategic financing choices of small businesses are examined through the lens of the business life cycle. The growth of small and medium-sized firms, i.e., those most vulnerable to information and incentive problems, is often constrained by the lack of access to external finances. Understanding the financial determinants of small and medium-sized firms at different stages of the business life cycle allows managers and policy-making institutions to correctly support firm growth. Here we argue that the controversy in the empirical literature on the determinants of financial decisionmaking is based on a failure to take into account the different degrees of information opacity, and, consequently, firms’ characteristics and needs at specific stages of their life cycles. The explanatory power of financing theories based on informational opacity is therefore highlighted and tested in this study. The results of an inductive approach based on cluster analysis showed that, ...

The study examined the choice of the different financing theories for explaining the capital structure source of Micro, Small and Medium enterprises (MSMEs) that seeks to raise their capital, through examining the affecting factors on the main capital structure decision. The study used a questionnaire for 220 of Palestinian MSMEs in order to examine the financing decisions in these firms according to the main capital structure theories. The study found that in accord with the POT, it was confirmed an approach comprising an initial check on the availability of internal resources, followed by the use of internal capital. Where the most of the sample were prefer to depend on the personal money rather than to increase their capital through the partners and loans. Therefore, this suggests the need to raise awareness with regard to the concept of capital structure and the other determinations that affect MSMEs' capital financing.

Empirical evidence suggests that cost-based considerations, firm-specific characteristics, and owner-specific factors — such as desire for control and managerial independence — are important determinants of capital structures of entrepreneurial firms.

Following on from the pioneering work of Modigliani and Miller (1958) on capital structure, three conflicting theories of capital structure have been developed. They are namely: trade-off, pecking order, and agency cost theories. Capital structure theories differ in terms of their emphases on taxes (the trade-off theory), differences in information (the pecking order theory) and agency problems (the agency cost theory).
This study provides evidence of the capital structure theories pertaining to Egyptian companies. Egypt may be similar to the developing countries previously studied, but it may differ due to the crisis and other political issues happened in Egypt lately. Thus, it made us more curious to trace changes in the financing behaviour if any.
This study investigates the determinants of capital structure of Egyptian companies utilising data from the financial statements over the time period from 2003 to 2016, to examine the determinants of capital structure of Egyptian companies. Then, data from some developing countries like: Brazil, Chile, Hong Kong, India, Malaysia, Mexico, Pakistan Singapore, South Africa, South Korea, Taiwan, Thailand and Turkey as well as Middle East countries: Jordan, Kuwait, United Arab Emirates were also analysed to examine whether differences of the Egyptian business and economic environment induce Egyptian companies to display different financing behaviour from that of companies in the emerging market countries included in the study.
The results indicate that the trade-off theory and the pecking theory are the most common theories to describe the financial behaviour of the Egyptian companies' choice of capital structure whereas there was little evidence to support the agency cost theory. The companies in the emerging market countries examined in this study seem to follow the trade-off theory and agency cost theory and, to small extent, the pecking order theory of capital structure.
The descriptive statistics indicate that there are differences between Egypt and the other emerging market countries in terms of using short-term and long-term debt, profitability, assets structure, growth and companies' size. The excessive use of short-term debt compared to long-term debt by Egyptian companies.
This research contributes to the literature regarding determinants of capital structure in Egypt. The outcomes of this research are beneficial to various practitioners (e.g. investors, stock market participants, financial managers).

This article is preliminary study discussing approaches in the study of firm’s capital structure. All scientific approaches described in this article were aimed at optimizing capital structure by searching minimum value of overall capitalization rate which in this case was the weighted average cost of capital. EBIT (Earning before interest and tax) can be maximized if overall capitalization rate were minimized. The final objective of capital structure research was to increase the wealth of the shareholders.

The purpose of this paper is to investigate the firm level determinants of capital structure of Egyptian publicly traded non-financial firms. The study investigates the firm level determinants of capital structure of Egyptian companies utilising data from the financial statements of 62 listed companies over the time period from 2003 to 2016. The study investigates whether the capital structure decisions in Egypt are closer to the assumptions of Trade-Off Theory, of Pecking Order Theory or of the Agency Cost Theory. The empirical evidence obtained allows us to conclude that Trade-Off and Pecking Order Theories are the most theories to describe the financial behaviour of the Egyptian companies' choice of capital structure whereas there was little evidence to support the agency cost theory.

The decision on capital structure makes an impact on the overall cost of capital and consequently value of the firm. The capital structure decision of growth companies is even more important as the companies require fresh fund to finance growth. In this study, the sales of software companies in India during 2000-2012
have demonstrated that they certainly fall under the category of growth companies.
However, these companies are mostly debt-free during the period of study. It
seemed that these companies follow Pecking Order Theory. This paper seeks to find out the reason behind almost debt-free capital structure and also demonstrates how liquidity management and risk management could take a pivotal role to determine the capital structure of these growth companies.

JEL Classification: G32, L86, O16, O43
KEY WORDS :
Capital Structure, Debt-equity Ratio, Growth Companies, Net Income Approach, Net
Operating Income Approach, Pecking Order Theory

This paper analyses trade-off theory and pecking order theory in a nested model using panel, Generalized Method of Moment (GMM) estimation techniques. The cash flow coefficient is statistically significant and negatively related to long term debt and total debt supporting the pecking order theory. The results show that the lagged dependent variable is statistically significant in all models specified supporting the dynamic trade off theory that firms adjust to long-run optimal debt ratio. The GMM results reveal that fixed assets and profit are determinants of capital structure. The empirical results imply that trade off theory and pecking order theories are compatible in a nested model.

In this paper, the strategic financing choices of small businesses are examined through the lens of the business life cycle. The growth of small and medium-sized firms, ie, those most vulnerable to information and incentive problems, is often constrained by the lack of access to ...

The paper investigates relationship between cash flow and debt. The panel generalized method of moment results reveal that cash flow is negatively related to both long term debt and total debt ratios. Our results support the pecking order theory of corporate financing and imply that there is a need for further development of the capital market to minimize the information asymmetry problem between the firms and the firms' financiers, to provide firms with easier access to debt and equity financing.

The purpose of this paper is to find out both the industry level and country level determinants of capital structure of Egyptian publicly traded non-financial firms. The study investigates the industry level and country level determinants of capital structure of Egyptian companies utilising data from the financial statements of 58 listed companies over the time period from 2003 to 2016. The study investigates whether the capital structure decisions in Egypt are closer to the assumptions of Trade-Off Theory, Pecking Order Theory or the Agency Cost Theory. The empirical evidence obtained allows us to conclude that Trade-Off and Pecking Order Theories are the most theories to describe the financial behaviour of the Egyptian companies' choice of capital structure whereas there was little evidence to support the agency cost theory.

In this paper we examine the prevailing theories of capital structure (Trade-off theory, theory of representation costs, Pecking-order theory and Market timing), in all quoted companies on London Stock Exchange, before and after the crisis, and the foreign capitals used in order to establish which theory best explains the capital structure of companies in the United Kingdom. For the first time we examined a large sample of companies in the years between 2000 and 2012. This paper's differentiation lies in that it turned out that in all British listed companies the investment has no impact on their borrowing levels, thus lending mainly serves their current liabilities and also positively assists the growth of the companies, and observes how the significance of the variable Markets to Book Ratio affect our basic theories after crisis. Our findings are more consistent with the Trade-off theory.

We study the financing strategies of 191 start-ups after they have received venture capital (VC) and thereby contribute to the staging literature. The VC backed start-ups have raised financing on 345 occasions over a five-year period after the initial VC investment. Surprisingly, bank debt is the most important source of funding for these young and growth-oriented companies, supporting the view that VC investors have a certifying role in their portfolio companies. Bank debt is available to firms with a lower demand for money, lower levels of risk and of information asymmetries, implying that staging of equity funding is less important for these firms. A firm only raises equity when it’s debt capacity is exhausted, hinting that equity investors are investors of last resort. New equity is provided by the existing shareholders in 70% of the equity issues, supporting earlier findings that staged financing is important in venture capital financing. New shareholders invest when large amou...

Determining optimal cash holding is vital to avoid financial distress, to enjoy strategic superiority, and to maximize the wealth of shareholders. The research on cash holding of the financial sector is still in its infancy in general and in Pakistan in particular. The main objective of this study is to explore “the determinants of cash holding” of 110 non-bank financial firms listed on the Pakistan Stock Exchange from 2011 to 2017. The audited financial data of sample financial firms have been collected from the “Financial Statement Analysis of Financial Sector 2011-2017” which is the publication of State Bank of Pakistan. This study employs different methods including correlation analysis, Panel unit root test, Pooled OLS, Fixed effect, and Random effect Models of regression to analyze the data in Eviews 9. The results show the negative effect of cash flow, size, and positive impact of growth opportunities are consistent with the prediction of trade-off theory. This indicates that firms with higher cash flow and larger firms hold fewer cash reserves and firms with more growth opportunities hold higher cash. However, the positive influence of ROA and the negative impact of leverage of the firm confirmed the presence of free cash flow and pecking order theories. This indicates that profitable firms hold more cash and highly leveraged firm tend to keep more cash in hand to avoid financial distress.

This review provides three contributions to research on the determinants of the corporate cash level and its effect on company value. First, the extensive theoretical basis of corporate cash policies is disentangled. I distinguish two categories of theories. The first category comprises theories that stem from capital structure research, namely the trade-off theory and the pecking-order theory. The latter category regards theories that focus on agency conflicts. The second contribution of this review is to identify the most common proxies used in empirical research, aggregate them into general categories of determinants, and compare their predicted influence according to different theories. In sum, 10 general determinants, such as firm size, growth opportunities, leverage, liquidity substitutes and corporate governance, are found to influence corporate cash holdings. The third contribution is provided by reviewing the empirical evidence of what determines the level and market value of cash holdings, comparing these observed associations to the predicted theoretical associations, and pointing out implications for future

We examine the determinant of capital structure from 84 public listed
companies of Indonesian Stock Exchange according to the pecking order theory for the
year 2006 in manufacturing industry. And we find significant positive variable of size
and significant negative variable of growth that determine the capital structure of public
listed companies in Indonesia. Other variables such as liquidity, profitability and
investment growth opportunity do not have significant impact on the decision made to
capital structure. We also find a distinguish behavior between the firms with the debt
ratio more than 50% and the firms with the debt ratio less than 50%. The companies
with the debt ratio more than 50% tend to use on average 38.68% of additional debt.