Corporate Financing in the Deleveraging Era

The corporate finance literature has focused on explaining the determinants of firms target capital structure and speed of adjustment using the well-established theories such as pecking order, signaling and trade-off theories. However, less attention has been paid to understanding the financing behavior of farm businesses using these theories. Unlike corporate firms with professional management, farm businesses are different in a way that family members participate in management, the owner is often the manager, the decision-making unit is small, and farms heavily depend on government subsidies to stabilize income. These distinctive setting in farm business may result in different patterns of capital structure decision-making. Hence, we evaluate the application of corporate finance theories in the context of understanding the relationship between target capital structure and profit in the farm business. We use a dynamic partial adjustment model to examine the determinants of capital structure and speed of adjustment, and detect capital structure theories with which the leverage ratio of farm business would comply. Our sample comprises a panel of 1500 Dutch farms over the years 2001 to 2015. We find strong evidence that farms prefer internal funds to external funds. Profit is negatively related to leverage, supporting the pecking order theory, which has often been rejected for large firms. Consistent with the signaling theory, we find that size is positively related to leverage. Farm asset structure, growth, investment, and earnings volatility significantly determine the target capital structure. An interesting finding is that farm leverage is highly persistent and that lagged leverage is the best predictor of subsequent leverage ratios. Also, farms appear to have target leverage ratio and are reported to adjust their leverage towards the optimal level. The speed of adjustment to the target capital ranges from 8.6% to 63%, and varies by farm size and farm. This evidence further confirms the existence of dynamics in the farm capital structure decision. This article provides insights to understanding the dynamic nature of farm capital structure and the applicability of capital structure theories in the farm business.

The main aim of this study is to investigate the factors that affect the capital structure of the Egyptian firms for building materials and construction sector and to analyze capital structures and whether optimal capital structure exists or not. A number of relevant theories of capital structure are reviewed, namely; the trade-off, pecking order and agency theories, in order to initiate some testable propositions concerning these factors that determine the capital structure of the building materials and construction Egyptian firms. This exploration is performed using panel data procedures for a sample of 18 firms listed on the Egyptian Stock Exchange during the period from 2003 thru 2012. The results recommended that profitability is negatively related to debt ratios (LTDR, TDR); whereas firm tangibility is positively linked to the debt ratios. Size, Non-debt taxes shields, liquidity and growth opportunities do not appear to be significantly related to the debt ratios. The findings of this study are consistent with the predictions of the trade-off theory, pecking order theory, and agency theory which show that capital structure models derived from these theories provide some help in understanding the financing behavior of Egyptian firms for building materials and construction sector. This study provided some groundwork to explore the factors that determine the capital structure of Egyptian firms for building materials and construction sector upon which a more detailed study could be based. Furthermore, findings should assist corporate managers to optimize their capital structure decisions. To the best of the authors’ knowledge, this study considers from the pioneering studies that explore the factors that determine the capital structure of the Egyptian building materials and construction firms by using the most recent available data. Moreover, this study to a certain extent goes to confirm the similarity of factors that affect the capital structure decisions in both developing and developed countries.

This study tests the trade-off and pecking order 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 pecking order theory, 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 pecking order and trade-off theories. These results are consistent with the view that the pecking order 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.

The study investigates the effect of factors explaining the cash holdings of hospitality sector in five countries of Western Europe, namely, France, Germany, Spain, Italy and United Kingdom for a period of 12 years (2005-2016). The effect of parameters i.e., size, leverage, capital expenditures, growth opportunities, liquidity, cash flow, asset intangibility, cash flow volatility, dividend payments and stock exchange on cash holdings has been empirically tested by employing dynamic estimation methodology i.e., Generalized Method of Moments (GMM). The findings reveal that growth opportunities and dividend payments have a positive effect on cash holdings, while size, leverage, liquidity, cash flow, asset intangibility, cash flow volatility and stock exchange pose a negative effect. Moreover, the subsectors such as airlines, gambling and restaurants and bars are holding more cash in comparison to the travel and tourism. The study empirically supports the trade-off, pecking order and free cash flow theories of cash holdings for the hospitality sector. The academic implications of the study reflect that larger companies in the hospitality sector of Western Europe are more diversified and hence amass more cash. Similarly, supporting the cash flow theory, larger hospitality sector companies hold more cash to bar the agency issues. Moreover, companies in the hospitality sector keep less cash as such companies face close monitoring and attain leverage cheaply. Supporting the trade off theory, companies in the hospitality sector hold considerable fund of cash to counter cash shortages for making investments. Furthermore, companies in the hospitality sector experiencing more cash flows keep less cash, as influx of cash flows serve as a source of liquidity. Furthermore, to be able to pay stable dividends, the hospitality sector companies amass more cash and hence support the trade off theory. The practical implications of the study shows that by utilizing the empirical findings in this study, an investor sensitive to empire-building traits of managers for their private benefits, can infer that large hospitality companies with more leverage and capital expenditures will hold less cash. However, holding excessive cash in such companies can create agency problems. On the other hand, large hospitality companies holding more cash would have an ease in practicing debt financing as holding more cash is an indication of diversification and expansion, making shareholders more heedful about their net earnings.

The aim of the present study is to examine which of the two main rival theories of capital structure (trade-off and pecking order theories) better explains the behaviour of the Greek firms' capital structure during debt crisis. The sample consists of accounting data for 142 non-financial listed in Athens stock exchange (ASE) firms for a period from 2008 to 2014. Using panel data analysis, three regressions are estimated for three periods: 2008–2014, 2008–2010 and 2011–2014. The statistical analysis: 1) supports that trade-off theory better explains the firms' capital structure during the total period and the second sub-period, while the combination of pecking order theory and trade-off theory during the first sub-period, 2) indicates that the change of the economic conditions due to the memorandum of understanding (MoU), signed between the Greek Government and its creditors and the debt crisis may led the firms to adjust their capital structure, 3) provides evidence that during 'regular' economic conditions, both capital structure theories are applied, while in economic conditions of a severe debt crisis that is accompanied by changes in tax rates, the trade-off theory is dominant.

Plantation is a promising sector, but just like other firms, this sector will also face the financing problem. Capital structure determines the cost of capital and the risk assumed by the firm. Trade-off and Pecking order theory are the most common theory used to determine the capital structure. The objective of this research is to examine plantation companies tend to use trade-off theory or pecking order theory in determining the capital structure decision. This research used multiple linear regression analysis methods with capital structure as the dependent variable, and the asset structure, firm size, company growth, institutional ownership, effective tax rate, and non-debt tax shield as the independent variables.This is a quantitative research that uses secondary data from financial statements of plantation companies listed in the Indonesia Stock Exchange for 2014 to 2019. The sample was determined by using the purposive sampling technique and 5 out of 21 companies fulfill the sampling requirements. This study conducted observations for 6 years with a total of 30 research samples. The results of this research are both trade-off and pecking order theory are used and still relevant in the capital structure determination. Trade-off theory exerts more influence on capital structure decisions than pecking order theory. This is confirmed by the partial T-test where firm size, institutional ownership, effective tax rate, and non-debt tax shields suggest the use of trade-off theory, only asset structure indicates the tendency of pecking order theory.

The main purpose of this study is to simultaneously examine the pecking order and trade-off theories of capital structure and determine which one performs better for a sample of US firms. Our empirical models, which allow the financing coefficient and the rate of adjustment to vary with the firms' characteristics, provide evidence that the trade-off theory factors play a significant role in determining the proportion of debt to be issued or repurchased under the pecking order assumptions. In addition, we find that the pecking order factors are major determinants of the rate of adjustment under the trade-off theory assumptions. These empirical results imply that the pecking order theory and the trade-off theory are not mutually exclusive.

Capital structure has an impact on the short and long term. Funding provided by banks is inseparable from the availability of funds from third parties in the form of savings, demand deposits and deposits. The entry of third party funds must be balanced with the funds disbursed by the company. Therefore, management policy greatly determines the position and composition of funding. This study aims to analyze and determine several capital structure theories, namely Pecking Order Theory, Trade-Off Theory and Market Timing Theory. The variable of Pecking Order Theory is represented by funding deficit, long-term debt, and total debt. The variable of Trade-Off Theory is represented by tangi-ble assets, growth, size, profitability, total debt, and long-term debt. The variable of Mar-ket Timing Theory is represented by Equity Finance Weighted Average of market to book ratio and leverage ratio. This research is quantitative research. The samples used in this study are 100 data of commercial banking companies listed on IDX period 2011 - 2015. Data are obtained using purposive sampling method from banks registered at www.idx.go.id. Multiple Liner Regression is used in analyzing data using SPSS IBM 23. The results of the research show that Trade-Off and Market Timing Theories can be implemented by banking companies in terms of determining capital structure. This re-search implication is to enhance management choices, especially on how to set capital structure of the company.

The study investigates the relationship between financing behavior, earnings management, and firm value, focusing on a sample of non-financial firms over the period 2014-2023. A sample of stratified sampling techniques, 202 firms were selected from the population. In the fixed-effects model, the study explores the impact of debt usage (leverage) on firm value, considering earnings management as a moderating variable. The findings reveal a positive and significant relationship between financing behavior and firm value, which is consistent with the Trade-Off Theory, Modigliani & Miller Theorem, Pecking Order Theory, and Agency Theory. These theories suggest that strategically using debt can enhance firm value by exploiting tax shields, improving managerial discipline, and aligning shareholder-manager interests. However, the study also finds that the moderating effect of earnings management leads to a sign reversal in the relationship between financing behavior and firm value. This relationship shows a substitution effect. This result is explained through Agency Theory, Signaling Theory, Trade-Off Theory, and Pecking Order Theory, which highlight that earnings management can either amplify or distort the true impact of financing behavior on firm value. Earnings management, when used to signal financial stability or manage financial distress, can alter investors' perceptions and affect the financial health of firms. The analysis indicates that while earnings management can be beneficial in certain contexts, excessive manipulation may undermine the positive effects of debt on firm value. The study contributes to the literature by providing empirical evidence on how financing behavior, moderated by earnings management, affects firm value, with implications for corporate financial strategies and policy-making.

This study seeks to investigate whether firms’ capital structure decisions are congruent with the assumptions underpinning the traditional trade-off theory and the pecking order theory in Ghana. Using a sample of listed firms, the dynamic system generalized method of moments (GMM) technique is applied on a balanced panel data spanning 2008–2016. The findings reveal that the financing decisions of Ghanaian firms adhere to the pecking order theory, given the established relationship between leverage and profitability, firm age, as well as firm size. The study also shows that tax does not matter for corporate leverage, departing from the tax proposition of the traditional trade-off theory. However, the negative effect of growth opportunities and risk on debt corroborates the trade-off theory. Consequently, it is postulated that the trade-off theory and the pecking order theory are not discordant in predicting firms’ capital structure decisions in Ghana.

The firm’s market capitalization is an ideal proxy of the size of listed firms. Hence, this paper uses the firm’s market capitalization to capture the firm size instead of using other prior proxies to investigate the relationship between the market capitalized scale and corporate capital structure by employing the Generalized Method of Moments (GMM) method to conduct analysis based on a sample of the 300 largest listed firms in China from 2010 to 2017. The CSI300 list consists of two subsample (CSI100 and CSI200), divided upon the firm’s market capitalized scales to represent both large-cap and small-cap firms. Our paper contributes to the literature on corporate finance by obtaining some new empirical results to assess the effect of market capitalized scale on corporate capital structure. We find that the market capitalized size has a significantly negative association with corporate leverage. We also find that both the Trade-Off Theory (TOT) and Pecking-Order Theory (POT) can partially explain the capital structure of the listed firms of the CSI300 Index such that the negative relationship between the market capitalized scales and corporate leverage is firmly identified in small-cap firms. Third, we observe that the greater validity of the POT’s predictions is enhanced in small-cap firms such that the greater inverse impact of profitability and the more significant positive effect of growth opportunities on corporate leverage are clearly shown in small-cap firms. Inversely, the more significant adverse effects of non-debt tax shields on corporate leverage are found in large-cap firms and there is no difference in the impact of tangible assets on debt ratios between CSI100’s listed companies and CSI200’s listed enterprises. Academics and practitioners could use our findings to draw better implications while policymakers could use our results to obtain better policies to improve the banking system with small listed companies.

Based on the findings of a study focused on medical institutions(Fama & French, 2002), this study determined possible causality between determinants of capital structure and liability level, while estimating targeted debt ratio. Moreover, it also examined hypotheses about the adjustment of targeted debt ratio and the of fundraising patterns, so that it verified the relative priority of trade-off theory and pecking order theory. First, profitability had positive(+) relationships with liability level, while investment opportunities had negative(-) relationships with liability level. This finding supported pecking order theory, and non-liability tax shield effects had negative(-) relationships with liability level as estimated in both trade-off theory and pecking order theory. Next, this study verified trade-off and pecking order theory at once by means of regression analysis about the variation of liability level in associations with disparity from targeted debt ratio and short-term fluctuation of profit and investment. As a result, it was noted that liability level became mean-reversed to targeted liability ratio but slowly, SO it was difficult to assert that such mean reverse may support trade-off theory. However, the finding that most of short-term fluctuations of profit and investment are absorbed into liabilities supported pecking order theory. On the other hand, it was found that the larger scale of medical institutions is more supportive of pecking order theory in the associations between liability level and profitability and the fundraising patterns than trade-off theory.

This study intends to examine the choices of capital structure from Taiwanese electronic firms. Empirical results here provide the evidence that Taiwanese electronic firms follow the different financing behaviour depending on the level of profitability. This study adopts two separated processes: First, we adopt Panel Unit Root Tests and find that under the different profitability the firms have different financing behaviors. Second, we adopt the model of Watson and Wilson (2002) to determine the order of the capital. We find out that the firms with a high level of profitability support the pecking order theory but the firms with a low profitability turn to support the static trade-off theory. However, the firms with the medium profitability cannot have any significant results. Key words: Capital structure, Trade-off theory, pecking order theory.

Este estudo tem como referência os trabalhos realizados por Fama e French (2002), desenvolvido com dados de empresas norte-americanas, e por Brito e Silva (2003), elaborado com dados de empresas brasileiras. O trabalho testou as previsões das teorias de trade-off e pecking order sobre endividamento e payout, utilizando a metodologia de Fama e McBeth (1973). Os resultados demonstraram que as empresas brasileiras aumentaram a meta de remuneração, porém ainda distribuem uma proporção pequena dos lucros, se comparados ao padrão americano, apesar de a legislação brasileira ser bastante favorável. Os resultados indicam que o payout é negativamente relacionado com as oportunidades de investimento e que os dividendos não sofrem variação de curto prazo para acomodar os investimentos, conforme defende a teoria do pecking order. A lucratividade demonstrou ser relevante na determinação da política de endividamento, o que indica que as empresas mais lucrativas são menos endividadas, confirmando a pecking order. Além disso, a variável "tamanho" mostrou ser significativa na política de endividamento, o que corrobora as teorias do pecking order e trade-off.

This article tests the trade-off theory against the pecking-order theory of corporate financing behavior on a panel data set of publicly traded Japanese firms for 1964 to 2005. Comparing the explanatory powers for both the trade-off and the pecking-order models, we find the following. First, for the financing behavior of Japanese firms, the pecking-order model has much greater explanatory power than the trade-off model, while both models are still statistically significant. Second, running the quantile regressions, which allow for the non-normal conditional distribution of the dependent variable, the behavior of most Japanese firms is strongly consistent with the pecking-order prediction. In this sense, the financing behavior of most Japanese firms obeys the pecking-order theory, and this tendency holds for almost the entire period after 1964. The pecking-order theory has no well-defined optimal capital structure, and the meanings of interest tax shields or the costs of financial distress are assumed to be second-order. This means that the financing behavior of Japanese firms is driven mainly by the need for external funds, not by the adjustment to an optimal capital structure.