French Firm’s Financing Choices: Towards a Reconciliation of the Static Trade-Off Theory and the Pecking Order Theory?

Gharsalli Mazen

doi:10.5430/ijfr.v3n1p57

Abstract

The main purpose of this study is to examine the validity of the static trade-off theory and the pecking order theory using a French panel data. Our empirical tests provide that we can not formally reject either of the two theories explaining financing behavior. However, they confirm the importance of considerations provided by the static trade-off theory. On the contrary, when we combine the adjustment model and the pecking order model we find that the statistical power of the hierarchical model is improved and the choice of financing of French firms confirms the greatest explanatory power of the pecking order hypotheses.

Highlights

The capital structure policy is not a new area of research, it remains one of the most interesting and puzzling topics
The main purpose of this study is to examine the validity of the static trade-off theory and the pecking order theory using a French panel data
On the contrary, when we combine the adjustment model and the pecking order model we find that the statistical power of the hierarchical model is improved and the choice of financing of French firms confirms the greatest explanatory power of the pecking order hypotheses

Summary

Introduction

The capital structure policy is not a new area of research, it remains one of the most interesting and puzzling topics. The financial literature in this field was marked by the contributions of Modigliani and Miller (1958), Miller (1977) and Myers (1984) The contributions of these authors relate, primarily, to the recognition of two theses: the first relates to the absence of impact of the leverage on the market value of the firm. The second one concerns the well celebrated article of Modigliani and Miller (1958) which constitutes the starting point of the majority of the studies relating to the leverage. These two pioneers’ works, by adopting a certain number of hypotheses, primarily the existence of perfect and frictionless capital markets, prove the irrelevance theorem. This obviously implies that there are no interactions between corporate finance and investment decisions

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Conclusion