De Medeiros, O.R. and Daher, C.E. (2004) test two models with the purpose of finding the best empirical explanation for the capital structure of Brazilian firms. The models tested were devel- oped to represent the Static Tradeoff Theory and the PeckingOrderTheory. The sample consists of firms listed in the Sao Paulo (Brazil) stock exchange from 1995 through 2002. By using panel data econometric methods, we aimed at establishing which of the two theories has the best ex- planatory power for Brazilian firms. The analysis of the outcomes led to the conclusion that the peckingordertheory provides the best explanation for the capital structure of those firms. The capital structure theory has been dominated by the search for optimal capital structure required for any firm Shyam-Sunder and Myers (1999). According to Myers (1984) firms tend to utilize their retain earnings for purpose of financing when it is financially feasible and adequate. The reason is simply the adverse selection. Shyam-Sunder and Myers (1999) proposed that when any firm requires funds from external sources the equity is rarely issued. The firms simply opt for debt given that information costs associated with debt is lower that equity. They also refined these ideas into key testable predictions.
Capital structure decision is crucial for a firm to ensure credit is not a threat to a firm, instead it acts as a boosting factor for the company growth and survival. Companies commonly refer to the two competing theory, the peckingordertheory and the trade-off theory in determining their optimal capital structure. The comparative study is to find evidence of the application of the peckingordertheory in food and beverages industry in two countries, Malaysia and Thailand. The paper includes five explanatory variables in determining companies leverage; which are profitability, asset tangibility, growth opportunity, firm size, and liquidity level. Employing the unbalanced panel data, the study estimates the random effect model for Malaysia and the fixed effect model for Thailand. The study covers ten (10) years period from 2004 to 2013 of 37 Malaysian F&B companies and 38 Thailand F&B companies, all are publicly listed in the Bursa Malaysia and the Stock Exchange of Thailand respectively. The results find evidences of the peckingordertheory application in both countries. Except for asset tangibility and growth opportunity, findings for Malaysia and Thailand are relatively similar.
The regression model for the long term debt ratio gives most explanatory power to firm size and asset tangibility. Both regression coefficients are in line with the prediction derived from the static trade off theory. However, the positive coefficient for asset tangibility has also been predicted by the peckingordertheory. This is making it hard to say what theory is the driving factor behind the positive impact of asset tangibility on the long term debt ratio. The coefficient for asset tangibility is also highly significant at the 1% level. Making the coefficient estimate reliable. For the non-debt tax shield a low positive coefficient has been found but the coefficient is not significant with a p-value of 0.704. This tells us that based on this data set the chance of non debt tax shields not having an impact on long term debt ratios is 70,4%. For the firm specific determinant growth opportunities I reports a very small positive coefficient which is not significant. Profitability shows a very small positive coefficient which is highly insignificant. So on this part there is not much evidence for both theories. The highly significant positive coefficient for firm size shows some evidence in favour of the static trade off theory. However, some authors argue that the positive relationship can also be explained by the peckingordertheory (Frank and Goyal, 2005) They argue that the peckingorder is usually interpreted as predicting a negative relationship between financial leverage and firm size. The argument is that larger firms have been around longer and are better known. This means that large firms face lower adverse selection costs and can more easily issue equity than smaller firms who face higher adverse selection. They state that there is one important caveat. Larger firms also have more assets and so the adverse selection may become more important if it impinges on a larger base. Because the relationship between firm size and financial leverage is rather ambiguous the positive significant coefficient cannot be seen as
The peckingordertheory is one of the most crucial theories in corporate finance field. Empirical test on this theory is very common in western coun- tries while domestic empirical study is still relatively limited in China. The majority of previous studies mainly concentrate in the whole capital market. Over the last decade, manufacturing sector experienced incrementally rapid development in China. The manufacturing sector not only makes critical contributions to China’s economy and society development, but also becomes key force in supporting the world economy. Thus, this article tests peckingordertheory on Chinese publicly traded firms in manufacturing sector. Using a panel of 1212 observations during the period between 2013 and 2015, we draw the conclusion that there is no evidence to back up the peckingordertheory. Further subsample analysis indicates that peckingorder does not ap- ply to Chinese manufacturing listed firms with both high float shares ratio and low float shares ratio.
On this way, we can suggest some “PeckingOrder” which describes the capital structure of business start-up. If we treat the equity contribution and personal debt as internal funds, we find that many companies consider their internal funds, fewer companies relate to debt and less to venture capitalists. This confirms the message which is transmitted by Myers and Majluf, (1984) about the “Peck- ing Order”. Some authors introduced the need to revise the POT, since they found evidence that both retained earnings and external equity are quite unusual means of financing for new firms; debt also seems to be disre- garded compared to internal funds . Literature has recently introduced a revised version of the POT, where external equity is preferred over external debt in the case of innovative firms . According to his study the peckingordertheory in the case of innovative firms is reversed as follows: 1) Insider Capital, informal private equity and easy-term financing (seed); 2) Venture capital financing (start-up); 3) Self financing, banks and or busi- ness credit (early growth); 4) Direct issue of bonds and public equity (sustained growth).
South Africa firms, whose managers has more information than investors use hierarchy of financing strategy because of information asymmetry costs associated with raising external capital. As a robustness test (see Table 4) we report system GMM which gives similar results because cash flow is significantly and negatively related to both long-term debt and total debt ratios. In addition, the results imply South African firms retain a large portion of their cash flow and reduce use of external finance. Our study is consistent with findings of Fama and French (2002) and Sen and Eda (2008) who find evidence in support of peckingordertheory. Conversely, our results are inconsistent with the findings of Tong and Green (2005) and Nunkoo and Boateng (2010) who found opposite results.
Most of the empirical studies of those theories had focused on U.S. firms and other developed country. While most existing studies focus on developed countries, it is interesting and important to assess the validity of the dominant theories of capital structure in Indonesia. Indonesian Stock Exchange is characterized, among other things, by the domination of large shareholders (Gunarsih, 2003), unlike another country that the main agency problems that occurred is between managers and company owners (shareholders). Thus the structure of corporate governance in Indonesia is different from other countries, such as the United States. Ownership structure of listed companies in Indonesia is concentrated on a few owners while the ownership structure in the United States is spreading to many owners with a relatively small proportion of ownership. In the concentrated ownership structure, the main agency problem is the majority holder with minority, while in the spread ownership, the main agency problem is between managers with the owner.
Concerning cash flow forecasts, numerous studies have been conducted in Iran although no practical trial has been ever performed regarding combinational impact of leverage and cash flows over future cash flows. Jalali (2003) conducted a survey on Tehran Stock Exchange and concluded that financial leverage and degree of financial leverage changes poorly affect periodical cash flow but in positive way. In other words, an increase in financial leverage can boost company cash flow followed by cash flow derived from operations activities and financing but no association was found between financial leverage and cash flow derived from investment activities. Rezvani Raz and Haghighat (2005) carried out a study on relationship between free cash flows and debt rate by considering the investment opportunities and size in Tehran Stock Exchange listed companies. According to this study, there is a significant and positive association between free cash flow and debt rate in companies with low investment opportunities and in large corporations. In addition, they concluded that in Tehran stock exchange listed companies, the investors and creditors consider internal funding source and assessment criteria of debt recouping capability namely the free cash flow in their decision for investment and granting credits.
shields. More detailed information about most of the empirical studies mentioned below can be found in table 1 in the appendix. For firm size and leverage, the empirical evidence seems to mostly support a positive relationship (e.g. Fama & French, 2002; Byoun, 2008; Dang, 2013; Li, 2015; Singh, 2016). However, there are also studies that have found a negative relationship between firm size and leverage (e.g. Faulkender & Petersen, 2006; Pinkova, 2012). Next, the empirical studies seem to support a negative relationship between profitability and leverage (e.g. Rajan & Zingales, 1995; Antoniou et.al., 2008; Psillaki & Daskalkis, 2009; Dang, 2013; Serrasqueiro & Nunes, 2014; Pacheco & Tavares, 2017). However, there are also several studies that have found a positive relationship (e.g. Danis et.al. 2014). Further, there seems to be more evidence for a positive relationship between asset tangibility and leverage (e.g. Rajan & Zingales, 1995; Chen, 2004; Ramlall, 2009; Janbaz, 2010; Qiu & La, 2010; Pinkova, 2012). However, there are also studies that have found a negative relationship (e.g. Booth et.al., 2001; Drobez & Fix, 2003). Moreover, for liquidity and leverage, there seems to be more evidence for a negative relationship (e.g. Reznakova et.al., 2010; Pinkova, 2012; Singh, 2016; Mota & Moreira, 2017). Contrary, the study by Nemati & Muhammad (2012), has found a positive relationship. Furthermore, most empirical studies have found a negative relationship between growth opportunities and leverage (e.g. Rajan & Zingales, 1995; Fama & French, 2002; Frank & Goyal, 2009; Lious et.al., 2016). However, there are also some studies that have found a positive relationship (e.g. Titman & Wessels, 1988; Chen, 2004). Lastly, the empirical evidence also seems to support a negative relationship between non-debt tax shields and leverage (e.g. Antoniou et.al., 2008; Reznakova et.al., 2010; Mota & Moreira, 2017). However, there are also some studies that have found inconsistent results for different countries (e.g. Dang, 2013). Additionally, some studies also find no significant relationship (e.g. Serrasqueiro & Nunes, 2010; Ahmed-Sheikh & Wang, 2011).
Chiarella & Phan (1991) conducted the research of 226 Australian companies. After applying the regression analysis, they concluded that there is a negative impact on profitability, the tangibility of assets and non-debt tax shield on Leverage live. Whereas, the debt ratio has a positive relationship with size, growth opportunities and cash holdings. Rajan & Zingales (1995) stated that the viability and the reliability of business could be examined by the time for which it is servicing its loan. As a result, the possibilities of asymmetries information between an organization and banks reduce. This ultimately has a positive impact on the Leverage ratio of the company. They argued that tangibility of assets and leverage of the firm has a positive relationship. In case, a firm fails to collaterals, there is a probability that moral hazards can arise at the end of borrower. In this scenario, lenders can ask for terms and conditions that are more suitable and therefore firms chose equity financing. To avoid this problem, firms have to make sure that their large numbers of assets are used as collateral.
Inclusion of the financial deficit variable to the conventional regression of capital structure, have rendered the effects of four conventional variables. Fur- ther, it states a significant positive relationship between the financial deficit va- riable and the debt ratio. Therefore, it shows the validity of financial deficit va- riable as a determinant of the debt ratio (Shyam-Sunder & Myers, 1999). The major factor affecting financing behaviour of a company is considered to be in- formational asymmetry according to the Peckingordertheory (Myers & Majluf, 1984). Therefore, the expectation is that companies will follow a strict peckingorder when the information asymmetry is high and vice versa. Companies which are smaller in size are considered to possess more information asymmetry com- pared to larger companies (Frank & Goyal, 2003; Chen et al., 2013; Komera & Lukose, 2015). In evaluating the validity of above stated fact in Sri Lankan con- text, the findings are conforming that significance of the explanatory power of information asymmetry regarding capital structure in Sri Lankan companies is high. The findings are complying with the findings of Sánchez-Vidal and Martín-Ugedo (2005), in studying the explanatory power of information asym- metry in Spanish. Further, Watson and Wilson (2002) also have found the same results for small and medium enterprises in United Kingdom. However, the findings are contradictory to the findings of Helwege and Liang (1996) and Fa- ma and French (2005) where they report that the informational asymmetry has no power in predicting capital structure. Therefore, it can be stated that the Sri Lankan companies follow predictions of the peckingorder and the major reason for the companies to follow the peckingorder, is stem from the information asymmetry concern. Ultimately, findings on the above stated three dimensions postulate that the Sri Lankan companies are more consistent with the original peckingorder hypothesis by supporting the literature that argues the existence of the peckingordertheory and the explanatory power of the informational asym- metry in determination of capital structure.
There is ongoing debate about the empirical performance of the peckingordertheory of financing proposed by Myers (1984) and Myers and Majluf (1984). The theory is based on asymmetric information between the firm’s investors and its managers. Due to the valuation discount that less-informed investors apply to newly issued securities, firms resort to internal funds first, and then debt and equity last to satisfy their financing needs. The empirical evidence for the theory has been mixed 1 , in part due to shortcomings of the empirical tests used. As a result, the central prediction of the theory – that of asymmetric information driving peckingorder behavior - has not been adequately evaluated. In this paper, we examine this central prediction within the context of a firm’s life cycle. 2
Syham – Sunder and Myers (1999) test the peckingordertheory and trade-off theory in the US market. For peckingordertheory, they regress the firm’s net debt issues on its net financing deficit. They find that the estimated coefficient on the deficit variable is close to one. Syham – Sunder and Myers (1999) interpret this result as evidence supporting peckingordertheory because a shortfall in funds is first met by debt. Furthermore, they find that the power of trade-off theory in explaining new debts issues is better than peckingordertheory because when the peckingorder model and trade-off model are nested in the same regression, all cases of peckingorder model are rejected (they use the net financing deficit as an additional explanatory variable in their trade-off theory model).
The peckingordertheory assumes that insider (managers) have more information about the prospects of the firms than the outsiders (investors) do and hence managers act in the best interest of the owners of the firms (Modigliani and Miller, 1958). This theory is an alternative to the trade-off theory suggesting that firms prefer internal financing (such as retained earnings) to external financing. However, debt financing is preferred only when equity funds are not sufficient to finance the growth of the firm. Contrary to trade-off theory there is no optimal debt ratio in peckingordertheory rather it suggest that capital structure of firm depends on the financing requirements of the firms over time. Accordingly, there is no concept of optimum capital structure (Beattie et al., 2004). The objective of this study is to test relevance of trade-off and peckingorder theories of capital structure based on bank specific variables using a panel data sample of twenty seven listed commercial banks in Bangladesh. The study is carried using traditional and advanced panel data econometric models supported by different statistical tests for panel data estimators.
Corporate performance has been identified as a potential determinant of capital structure. According to the peckingordertheory in the presence of asymmetric information, a firm will prefer internal finance, but would issue debt if internal finance was exhausted. The last alternative would be issue new equity. Myers (1984) prescribed a negative relation between profitability and debt. Profitable firms are likely to have more retained earnings. Successful companies do not need to depend so much on external finance. Empirical evidencefrom previous studies (Al-Sakran, 2001; Kayo and Kimura, 2010) appears to be consistent with the peckingordertheory. Most studies found a negative relationship between profitability and debt financing (Myers and Majluf, 1984; Daskalakis and Psillaki, 2008, Vasiliou et al., 2009). The return on equity is used as an index for firm profitability in this study.
This study tests the trade-off and peckingorder hypotheses of corporate financing decisions and estimates the speed of adjustment toward target leverage using a cross-section of 42 manufacturing, 24 mining and 21 retail firms listed on the Johannesburg Stock Exchange (JSE) for the period 2000-2010. It uses the generalised least squares (GLS) random effects, maximum likelihood (ML) random effects, fixed effects, time series regression, Arellano and Bond (1991), Blundell and Bond (1998) and random effects Tobit estimators to fit the two versions of the partial adjustment models. The study finds that leverage is positively correlated to profitability and this supports the trade-off theory. The trade-off theory is further supported by the negative correlation on non-debt tax shields. Consistent with the peckingordertheory, capital expenditure and growth rate are positively correlated to leverage while asset tangibility is inversely related to leverage. The negative correlation on financial distress and the positive correlation on dividends paid support both the peckingorder and trade-off theories. These results are consistent with the view that the peckingorder and trade-off theories are non-mutual exclusive in explaining the financing decisions of firms. The results also show that South African manufacturing, mining and retail firms do have target leverage ratios and the true speed of adjustment towards target leverage is 57.64% for book-to-debt ratio and 42.44% for market-to-debt ratio.
Using a unique dataset of 1270 Egyptian listed firm-year observations over 2003– 2014, we investigate whether the basic premises according to the peckingorder or market timing theories provide an explanation for the capital structure mix of Egyptian firms. Current work has provided mixed evidence in regard to these capital structure theories in the Egyptian context. Our results show that the most profitable firms are less likely to resort to external financing. However, in case where financial deficits exist then equity issued appears to track the deficit rather than debt. Moreover, issuances appear to track deficit periods instead of market timing attempts. Results obtained support notion that the typical Egyptian firm follows revised peckingordertheory, with the importance of the four conventional determinants, profitability, tangibility, size effect and growth opportunity in debt holdings.
The results for mature firms in the low predicted bond ratings cohort are very similar to those in the high predicted bond ratings cohort. This shows that a low likelihood of having a bond rating is not necessarily an indication that the firm is debt-constrained. More specifically, mature firms are less likely to be constrained by their debt capacity, whether they have access to the public debt markets or not. There are two possible reasons for this result: one, their need for external finance is not that great and hence they rarely reach their debt capacity; or two, even in the presence of large financial deficits, mature firms are also likely to have larger debt capacity because of their credit quality. Firm maturity is essentially a substitute for access to the public debt markets, i.e. among firms that are less likely to issue public debt (either due to firm choice or due to supply-side factors) mature firms still have access to a low cost of debt capital. Evidencefrom existing work supports this view. For example, Diamond (1989) shows how a good reputation mitigates the adverse selection problem between borrowers and lenders. Thus, mature firms who are more established and have longer credit histories are able to obtain better loan rates compared to their younger firm counterparts. Petersen and Rajan (1995) present evidence of higher absolute borrowing costs for younger firms compared to those of older firms, regardless of the competitive structure of the lending market.
However, some researchers argue that neither the trade-off theory nor the peckingordertheory provides convincing explanation to the capital structure choices some firms make. In the study done by Chen (2004) which tested the determinants of capital structure in Chinese listed companies found that Chinese companies do not follow the peckingordertheory or the trade- off theory. They concluded that Chinese firms follow the Modified Peckingordertheory with retained earnings, equity and then last debt. It points to the fact that assumptions underpinning the Western models are not valid in the case of China. In line with the argument made by Chen another study done by Delcoure (2007), which also studied the capital structure determinants but in Central and Eastern European countries, found that neither trade off theory, peckingordertheory, nor the agency theory explains the capital structure choice. Both studies, gives a room to make generalized assumption that the theories may actually not be applicable once it has been taken out from the origins it was developed. Chen (2004) and Delcoure (2007) both reached the conclusion that firms prefer equity over debt as it is not obligatory. Short term debt is much more deployed by firms in the Chinese market as well as in the former soviet countries, as there are other constraints such as the financial constraints in the banking system that influences capital structure.
In this paper, we study the extent to which the peckingordertheory of capital structure provides a satisfactory account of the ﬁnancing behavior of publicly traded American ﬁrms over the 1971 to 1998 period. Our analysis has three elements. First, we provide evidence about the broad patterns of ﬁnancing activity. This provides the empirical context for the more formal regression tests. It also serves as a checkon the signiﬁcance of external ﬁnance and equity issues. Second, we examine a number of implications of the peckingorder in the context of Shyam-Sunder and Myers’ (1999) regression tests. Finally, we checkto see whether the peckingordertheory receives greater support among ﬁrms that face particularly severe adverse selection problems. The peckingordertheory derives much of its inﬂuence from a view that it ﬁts naturally with a number of facts about how companies use external ﬁnance. 1 Myers (2001) reports that external ﬁnance covers only a small proportion of capital formation and that equity issues are minor, with the bulkof external ﬁnance being debt. These key claims do not match the evidence for publicly traded American ﬁrms, particularly during the 1980s and 1990s. External ﬁnance is much more signiﬁcant than is usually recognized in that it often exceeds investments. Equity ﬁnance is a signiﬁcant component of external ﬁnance. On average, net equity issues commonly exceed net debt issues. Particularly striking is the fact that net equity issues trackthe ﬁnancing deﬁcit much more closely than do net debt issues.