Trade-off vs. pecking order theory: evidence from Greek firms in a period of debt crisis

Abstract

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.