Testing Pecking Order Prediction of Financing Choices in NEPSE Listed Non-Financial Companies of Nepal (original) (raw)
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Revisiting External Pecking Order Hypothesis: Evidence from Sri Lankan Companies Capital Structure
Journal of Financial Risk Management
This research is based on pecking order theory, which is one of the major capital structure determinant theory, driven by the information asymmetry. The purpose of this research is to investigate whether the pecking order theory provides an accurate description of companies financing choices in the context. Further, to examine whether informational asymmetry plays an important role in determining the financing hierarchy, and whether the financial deficit variable plays a key role determining the capital structure, the analysis has been conducted by utilizing a unique dataset from the Sri Lankan listed companies within multiple industrial sectors from 2011 to 2017. Empirical analysis has been done based on Panel data analysis model with regression tools suggested. The findings suggest that company's follow original pecking order hypothesis where companies' preference towards debt is higher than equity in determining their capital structure. Moreover, financing choices are contingent on informational asymmetry. Moreover, the financial deficit variable has a significant impact compared to four more conventional capital structure determinants.
SOMTU JOURNAL OF BUSINESS AND MANAGEMENT RESEARCH TRIBHUVAN UNIVERSITY A Peer-reviewed Journal ISSN, 2018
This study tests the relevance and the applicability of pecking order theory and trade-off theory in financial decision making using 50 manufacturing and plantation sector companies listed in the Colombo Stock Exchange (CSE) from 2011-2017. Pecking order theory explains that there is no a well-defined debt equity target rather there is an order i.e., equity first and then external sources. Trade-off theory identifies the optimal debt-to-equity ratio as the level at which the cost of two offset each other. This study uses the pool regression, fixed effect and random effect models. Profitability, Tangibility, Firm size, Growth opportunity and non-debt tax shield were used as independent variables, while Leverage was the dependent variable. The study finds that both the theories are relevant in manufacturing sector and trade- off theory is applicable only for plantation sector in Sri Lanka.
International Journal of Science and Research (IJSR) , 2019
This study tests the relevance and the applicability of pecking order theory and trade-off theory in financial decision making using 232 companies and 1624 balanced panel data finance and Non- financial firms for the period of 2011-2017 listed in the Colombo Stock Exchange (CSE). Pecking order theory explains that there is not a well-defined debt equity target, and there two kinds of equity, internal and external, one at the top of the pecking order and one at the bottom. Trade-off theory identifies the optimal debt-to-equity ratio as the level at which the cost of two offset each other. This study uses the pool regression, fixed effect and random effect models. Profitability, Tangibility, Firm size, Growth opportunity and Non-debt tax shield were used as independent variables, while leverage was the dependent variable. The study finds both theories are relevant and pecking order theory is more applicable in Sri Lankan companies.
The Winners, 2012
Numerous empirical studies in the finance field have tested many theories for firms' capital structure. The pecking order theory and the trade-off theory of capital structure is among the most influential theories of firms' capital structure. The trade-off theory predicts optimal capital structure, while the pecking order theory does not predict an optimal capital structure. According to pecking order theory, the order of financial sources used is the source of internal funds from profits, short-term securities, debt, preferred stock and common stock last. The main objective of this study is to econometrically test whether the listed companies in Indonesian Stock Exchange follow the pecking order theory or the trade-off theory. Samples in this study are public companies listed during 2009-2010. The research questions are tested by running regression models. The empirical result of this study shows that the pecking order theory is not supported, while the trade-off theory is supported. This suggests that the capital structure of listed companies in Indonesian Stock Exchange is financed based on optimal capital structure, not by the order financial resources.
2014
2009), but the volatility of stock market operations due to insider trading, manipulation, malpractices and asymmetric information infested the popular perceptions on Stock Exchange (Myers and Majluf 1984). Inefficient stock market operations cause shares undervaluation problem and also the higher interest rate causes in increasing the finance cost which directly affects the firm value as well as shareholders wealth. The wrong decision of financing for investment opportunities leads to financial distress cost and bankruptcy and affect the image of the firm. It seems that it is vital to balance cost and benefit of debt while maximizing wealth of the shareholders through maximizing value of firms. Referring to this situation, Daily FT (April 20, 2012) pointed out that the recent rising domestic interest rates in Sri Lanka steals the appeal for equities and also it gives the relative asset allocation disconnect between equities and interest rates, it could dent the pace of corporate ea...
Pacific-Basin Finance Journal, 1993
We take a different approach to test Myers' pecking order theory of capital structure. It is based on the two requirements implicit in the theory: that the predictions of the theory apply only to firms facing asymmetric information and for making marginal financing choices. We obtain responses from a sample of large South Korean firms concerning the extent of their information problems, and their desired and marginal financing preferences.
Testing the pecking order theory: the impact of financing surpluses and large financing deficits
Financial Management, 2009
This paper extends the basic pecking order model of by separating the effects of financing surpluses, normal deficits, and large deficits. Using a broad cross-section of publicly traded firms for 1971 to 2005, we find that the estimated pecking order coefficient is highest for surpluses (0.90), lower for normal deficits (0.74), and lowest when firms have large financing deficits (0.09). These findings shed light on two empirical puzzles: first, small firms -although having the highest potential for asymmetric information -do not behave according to the pecking order theory, and second, the pecking order theory has lost explanatory power over time. We provide a solution to these puzzles by showing that the frequency of large deficits is higher in smaller firms and increasing over time. As a result, our findings support a pecking order theory that considers firms' debt capacities.
International Journal of Finance and Accounting, 2012
The aim of this empirical study is to explore the trade-off model and pecking order model of capital structure. The investigation is performed using panel data procedures for a sample of 76 firms listed in Tehran Stock Exchange during 2007-2010.The study employs OLS regression model in examining the capital structure of firms in Iran. The study employs variables reflecting differing theoretical arguments on capital structure. The results suggest that trade-off model and pecking order model are not mutually exclusive. Both trade-off model and pecking order model play an important role in determining the total debt level of firms. However, empirical results of long-term debt level consistent only with pecking order model but not trade-off model. This may because financial institutions in Iran do not concern seriously on the risk of insolvency. Firms with higher risk can access long-term debt financing as easy as firms with less risk. The findings of the study clearly demonstrate the importance of capital structure decisions for financial sources.
Testing the Trade Off and Pecking Order Models of Capital Structure
Abstract: In this paper, we test two-models of capital structure by using Shyam-Sunder and Myers (1999) approach for finding the capital structure behaviour of U.K. firms, whether firms follow pecking order or trade off model. Sample size consists of 60 firms and 51 firms; observation period ranges from 1992 - 2012 and 1995 - 2012. By using panel data regression in the two-sample size and periods, empirical results show that neither model is appropriate for giving any conclusive result for the capital structure behaviour of U.K. firms. Keywords: capital structure, pecking order, trade off model, empirical, behaviour of U.K. firms.
Testing Pecking Order Theory and Trade Off Theory Models in Public Companies in Indonesia
2015
The purpose of this paper was to test the trade off and pecking order theory of capital structure. We started with identifiying variables that influenced capital structure based on both theory. The data in the study were gathered from statistics and annual report of IDX in 2009. There were 46 companies that distributed dividends in 2008 (this year was as the base year to discover the changes) and 2009. Subsequently there were two companies were excluded because the availability of data and the reports were submitted in US Dollars. From 44 companies, there were 28 companies were excluded because there was not any financing deficits and the remaining 16 manufacturing companies were used as samples in this study. Despite the fact these results support the POT model; they were weak to elaborate the POT model as there were only 45.1% of the companies taking financing decision through debt. This can be explained based on market timing theory in the decision making of capital structure.