Abstract
AbstractA set of simultaneous equations for external financing and investment spending is developed that tests the pecking order hypothesis (Myers, 1984) against a partial stock adjustment model (Jalilvand and Harris, 1984 and Taggart, 1977). Consistent with a partial adjustment model, firms appear to adjust slowly to long‐run financial targets. However, additional financing needs follow a pecking order. This study also supports work by Fazzari, Hubbard, and Petersen (1988) and others showing that internal funds have an important influence in firm investment decisions. Finally, pecking order behavior is most (and partial adjustment behavior is least) pronounced in firms that have low long‐run dividend payout policies. This suggests that long‐run dividend policy reflects the extent to which firms face differential costs of external finance and liquidity constraints.
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