The pecking order theory and life cycle: Evidence from French firms (original) (raw)
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Pecking order and debt capacity considerations for high-growth companies seeking financing
Small Business Economics, 2010
This paper examines incremental financing decisions within high-growth businesses. A large longitudinal dataset, free of survivorship bias, to cover financing events of high-growth businesses for up to 8 years is analyzed. The empirical evidence shows that profitable businesses prefer to finance investments with retained earnings, even if they have unused debt capacity. External equity is particularly important for unprofitable businesses with high debt levels, limited cash flows, high risk of failure or significant investments in intangible assets. These findings are consistent with the extended pecking order theory controlling for constraints imposed by debt capacity. It suggests that new equity issues are particularly important to allow high-growth businesses to grow beyond their debt capacity.
Capital Structure Decisions During a Firm's Life Cycle
Small Business Economics, 2011
The study reported here examines the financing choices of small and medium-sized firms, i.e., those most vulnerable to information and incentive problems, through the lens of the business life cycle. We argue that the controversy in the empirical literature regarding the determinants of capital structure decisions 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 results show that, in a bank-oriented country, firms tend to adopt specific financing strategies and a different hierarchy of financial decision-making as they progress through the phases of their business life cycle. Contrary to conventional wisdom, debt is shown to be fundamental to business activities in the early stages, representing the first choice. By contrast, in the maturity stage, firms re-balance their capital structure, gradually substituting debt for internal capital, and for firms that have consolidated their business, the pecking-order theory shows a high degree of application. This financial life-cycle pattern seems to be homogeneous for different industries and consistent over time.
Corporate Ownership and Control
In this paper, we attempt to identify the firm-specific determinants of the capital structure of a sample of non-financial firms listed on the SBF 120 French index between 2009 and 2019 and to test whether the determinants offered by the two principal financial theories (e.g., trade-off theory and pecking order theory) are able to provide convincing explanations for their behavior in terms of financing decisions. Capital structure determinants discussed are size, profitability, asset tangibility, growth opportunities, liquidity, effective tax rate, and risk. The empirical analysis is carried out within a panel data estimation framework. Panel estimation techniques of fixed and random effects and ordinary least squares (OLS) estimation have been to test the hypothesized relationships. Empirical results showed that the majority of determinants had been significant. The size of the firm and its previous leverage have been found positively related to present leverage. The growth opportu...
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.
Capital Structure Determinants: New Evidence from French Panel Data
International Journal of Business and …, 2011
This paper examines the theoretical and empirical determinants of firms' capital structure choice. The emphasis here is placed on the role of capital market imperfections through the tradeoff, pecking order and market timing theories to explain firms' leverage. Our analysis is conducted on a sample of 244 French listed companies over the period 1997-2007.The empirical results point to the existence of complementarity between the tradeoff hypothesis and the financing deficit variable, while no meaningful effect was detected for market conditions on debt ratio. Market timing in its simple form or extended one, is not confirmed either. The relevance of lagged leverage ratio in all tests confirms the existence of a process of dynamic adjustment to a target level.
2007
This paper researches the determinants of incremental financing decisions made by high growth companies. For this purpose, we use a longitudinal dataset, free of survivorship bias, covering the financing events of high growth companies for up to eight years. Results are generally consistent with the extended pecking order theory controlling for constraints imposed by debt capacity. Profitable companies have a
Testing the Pecking Order Theory of Capital Structure in Brazilian Firms
The paper tests if the theory known as Pecking Order Theory provides empirical explanation for the capital structure of Brazilian firms. According to this theory, the capital structures would result from a hierarchy of financial decisions where internally generated resources would have first priority, followed by debt issues and, as last resort only, by equity issues. In its strong form, the Pecking Order Theory sustains that equity issues would never occur, whereas in its weak form, limited amounts of issues are acceptable. The methodology adopted in this empirical study involves cross-section regressions and the testing of hypotheses stemming from the underlying theory in its strong and weak forms. The upshot leads to the conclusion that the tested theory, in its weak form, is applicable to Brazilian firms, but the same does not happen with its strong form. The results also show that the goodness of fit of the Brazilian regressions are significantly better than those reported for American firms and that Brazilian firms seem to be closer to the Pecking Order's strong form than the American ones. The sample involves 132 publicly listed firms and the accounting data refer to 2001.
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.
Trade-Off Versus Pecking Order Theory in Listed Companies Around The World
Annals of the University of Petrosani Economics, 2012
This paper provides an insight into the literature on capital structure and its determinants. The capital structure refers to the specific combination of debt and equity and their use in financing the corporate operations. Considering there are various determinants of corporate financing patters, many theories have been developed over time. From Modigliani and Miller theory, which was the first to examine the impact of capital structure on firm value, the trade-off theory and the pecking order theory are probably the most influential theories of corporate finance. The paper reveals the main financial indicators that have a significant impact on the capital structure of companies operating in both developed and underdeveloped financial markets. According to the particular preference for a capital structure theory, researchers showed that asset tangibility, profitability and tax shield are significant in the trade-off theory while in the pecking-order theory, the most influential factors are long-term profitability and investment opportunities. Regardless the presumed theory, most studies found firm size as essential to financing decisions.
The pecking order theory testing on company life cycle
International research journal of management, IT and social sciences
This study was conducted on 49 property and real estate companies listed on the Indonesia Stock Exchange. Year of observation in this research is the year 2013-2017. Research samples of 49 property and real estate companies are grouped based on their life cycle criteria based on the…