Abstract
PurposeThe goal of this paper is twofold. First, to examine the role of expectations in shaping agents' behaviour within an extended time frame which incorporates a prolonged harsh downturn of economic activity. Therefore, the authors allow for an indirect impact of economy-wide expectations operating via their coexistence with firms' balance sheet factors. Second, it is tested whether the behaviour of listed firms as regards to debt follows the pecking order theory.Design/methodology/approachThe authors use the panel data methodology in the estimation of the financial structure models since unobservable heterogeneity is an important determinant towards the target leverage. A fixed effects estimation procedure, with robust intercepts allowed to vary across firms, was employed to examine the relationship between leverage and performance.FindingsThe findings offer evidence of patterns of pecking order behaviour and thus for the necessity of internal financing over external debt. The authors also extended the set of determinants by investigating the effect of macroeconomic conditions on the debt decision of firms. Contrary to the authors’ expectations, short-run beliefs of economic agents appear to play a negative role in leverage.Originality/valueThis paper contributes to the literature in a number of ways. First, following the growing literature of loan dynamics, the findings provide useful insights into corporate capital structure decisions in an economy in which businesses were almost excluded from external financing for over a decade. Second, in order to better understand corporate financing decisions, it is necessary to consider the overall economic framework in which companies and especially the listed ones operate.
Highlights
The impact of financial leverage on a firm’s investment decision has been a topic of major interest amongst academics
Almost the 75% of the time span of our sample is linked to a period in which the Greek economy faced the most dramatic drop in its economic activity following a tight economic adjustment programme forced by the European Central Bank (ECB), International Monetary Fund (IMF) and European Commission
Besides the a priori known balance sheet items, we examined the role of performance and the role expectations played in shaping businesses’ behaviour when forming their capital structure
Summary
The impact of financial leverage on a firm’s investment decision has been a topic of major interest amongst academics. A firm’s financial structure will not affect its market value in a world of perfect and complete capital markets Subsequent studies such as that of Jensen and Meckling (1976) demonstrated the collapse of the Modigliani and Miller theorem in the presence of either asymmetric information between investors and the firm or agency costs arising from the opposite goals of managers and shareholders. In this context, Myers and Majluf (1984) with the pecking order or financial hierarchy theory of financing challenged the neutrality of financial structure vis-a-vis the value of the company. It is evident that the capital structure literature supports that leverage and the overall value of the firm are strongly related (e.g. Myers, 1977; Fazzari et al, 1988; Whited, 1992; Aivazian et al, 2003; Umutlu 2010; Ibhagui and Olokoyo, 2019; Vo 2019)
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