Pecking Order Hypothesis Research Articles

CAPITAL EXPENDITURE DECISIONS: A STUDY OF MALAYSIAN LISTED COMPANIES USING AN ORDERED LOGISTIC REGRESSION ANALYSIS

Capital expenditure (capex) decisions have been extensively studied except in developing countries (Mansor and Hamidi, 2008). Capex implicitly affects institutional aggregate demand, gross national product and business cycles. This research focuses on the capex decisions by Malaysian public listed companies (PLCs) between the years 2002 to 2006. Using the Pecking Order Hypothesis (POH) and Managerial Hypothesis (MH) frameworks, four independent variables are examined. These are (i) internal cash flows (ICF); (ii) Insider Ownership (I_O); (iii) Investment Opportunities (IOP); and (iv) the interaction effects of the variables. In addition, sales revenue is used as a control variable. Both hypotheses predict a positive effect of (IFC) on capex. However, their arguments differ in relation to the effects of (I_O) on capex. MH argues for a negative relationship but POH proposes no effect between the two. POH suggests a positive effect of (IOP) on capex whereas MH predicts no relationship between them. Using a pool Ordered Logistic Regression (OLR) model, capex is categorised into five ordinal categories and the control variable is divided into four groups, which are ranked to capture the variability of the capex. The result of this study shows that the (ICF) has a positive and significant effect on capex, and this finding supports both studied hypothesis. However, (I_O) and (IOP) show a negative and significant effect on capex. The study also found that there is a conflict of interest between managers and shareholders base on the negative coefficient of (I_O). This finding is consistent with Kim (2006) and supports the MH. This study provides mixed-support for the two hypotheses and reveals interesting characteristics with regards to the managerial style in Malaysian PLCs.Keywords: capital expenditure, managerial style, Malaysian public-listed companies, ordered logistic regression, group effect

Insurer Growth Strategies

AbstractWe study corporate growth strategy within the U.S. property–casualty insurance industry—where firms are required to report uniquely detailed operating information. We present and test two hypotheses related to the manner in which firms choose to grow: the pecking order hypothesis and the managerial discretion hypothesis. Our results imply that insurers follow a general pecking order of growth strategies, where they tend to grow first by entering new states, then by adding new lines of business, and finally through acquisitions. This order is consistent with firms initially choosing to grow in the least costly and complex manner and subsequently choosing more costly and complex methods. We also find evidence in support of the managerial discretion hypothesis as mutual insurers are less likely to choose to grow and, when they do, they tend to select less complex growth methods.

The Nature and Determinants of Capital Structure in Indian Service Firms

In the Indian context, the service sector has played an important role in the development of the economy since reforms in 1991, and is expected to continue to contribute significantly to the growth in the economy in the coming decades. With this rationale, service firms were selected for the study for the time frame from 2011 to 2015, and the nature and determinants of their capital structure are studied. Since interest expense gives tax shelter to firms, the trade-off theory suggests that firms may be incentivized to use these shelters and thus increase leverage. Therefore, this theory was put to test here. The pecking order theory which states that the firm will raise capital from internal accruals followed by debt and finally equity was supported by the research in this paper. Further conclusion derived from the study was that capital structure, as measured by debt-to-asset ratio, remained stable in the 5- year period with an industry average of about 0.31. This study also tested the hypothesis on the trade off model of capital structure, which stated that there is an optimal capital structure which firms tend to move toward, and several approaches were adopted to measure if this hypothesis was true. While firms' debt level in a year could be reasonably predicted by the debt-to-asset ratio in the prior year, the fit of the OLS regression became progressively worse as the number of lagging years was increased, suggesting that capital structure was sticky. The industry debt-to-asset ratio, while statistically significant as a predictor of firm debt level, resulted in a regression with a poor overall fit. While there is evidence to accept the pecking order hypothesis, there was not enough evidence to reject the trade-off model of capital structure for Indian service firms in the selected time period.

Determinants of capital structure in Australia: an analysis of important factors

PurposeThe purpose of this paper is to examine the many factors that affect the leverage decisions of publicly traded Australian companies, and tests to see whether these factors are reliably important. The relationship between these factors and the leverage decision is examined.Design/methodology/approachThis study uses a multiple linear panel regressions to study the relationship between the factors and leverage.FindingsThe authors find a set of eight factors which are reliably important for capital structure decision making. These factors include: profitability, log of assets, median industry leverage, industry growth, market to book ratio, tangibility, capital expenditure, and investment tax credits. The empirical evidence indicates weakening support for the pecking order hypothesis and increasing support for the trade-off theory in Australia.Originality/valueThis paper examines the determinants of capital structure using Australian firms and provides a comprehensive empirical support for the capital structure theories.

Reconciling Theory and Evidences for Corporate Financing in India

The article tries to reconcile theoretical predictions of the two most important capital structure theories with evidences for corporate financing in India. We identify that while the pattern of leverage supports the prediction of pecking order hypotheses strongly, the key arguments of the theory are missing. We also found a significant explanation for incremental changes in debt ratios caused by mechanical stock price movement as compared to the changes caused by the overall issuance activities of firms. Firms do not seem to readjust their debt ratios to counter the drift caused by these stock-related movements in debt ratios. JEL Classification: G32, G20, H25, H62, E62

El financiamiento de las pymes del sector de software y servicios informáticos en Argentina

Este artículo estudia la estructura de financiamiento de pymes del subsector de software y servicios informáticos (SSI) de la Argentina y compara estas últimas con pymes del sector industrial, para los años 2006 y 2010. Los resultados muestran la preponderancia del autofinanciamiento para todas las empresas analizadas, en la que se observa una mayor dependencia de esta fuente de financiamiento para las del subsector SSI. Con respecto a las fuentes externas de financiamiento, en particular para los activos fijos, existe una diferencia entre ambos sectores analizados: las firmas SSI emplean pasivos corrientes como primera fuente de financiamiento, mientras que las firmas industriales recurren a las instituciones financieras. Estos resultados se alinean con las predicciones de la hipótesis de jerarquía financiera y con el ciclo financiero de crecimiento.

What Drives Security Issuance Decisions Of Firms Listed On The Johannesburg Stock Exchange: Market Timing Or Dynamic Trade-Off Theory Or Both?

This study used the random effects Tobit model to investigate the validity of the market timing, trade-off and pecking order hypotheses of capital structure in 143 non-financial firms listed on the Johannesburg Stock Exchange. The results show that leverage is positively correlated to the modified external finance weighted average market-to-book ratio (EFWAMB). Firm profitability and growth rate are negatively correlated to leverage whilst firm size and asset tangibility are positively correlated to leverage. The firms also have target leverage ratios towards which they actively adjust at an unbiased speed of 41.80% for the market-to-debt ratio and 52.82% for the book-to-debt ratio. EFWAMB has a negligible effect on the firms’ speeds of adjustment towards target leverage. The results are robust. These results reject the market timing hypothesis in support of the dynamic trade-off and pecking order hypotheses. They further confirm the fact that these two theories of capital structure are not mutual exclusive.

Factors affecting speed of adjustment under different economic conditions

Purpose – This study aims to examine the existence of capital structure dynamics and speed of adjustment during different economic periods. This study adds to the existing body of literature by investigating the factors influencing adjustment process toward target debt in developing economies. Design/methodology/approach – By employing two-step generalized method of moment (GMM) and sensitivity analysis, the study highlights critical factors which affect firms’ adjustment mechanism for target debt. Findings – Dynamic GMM estimations confirm the substance of past leverage on current debt, which recognizes the existence of dynamic capital structure. The findings corroborate that adjustment process is subject to trade-off between convergence rate and cost of being off-target. The fraction of financing of Pakistani firms confirms the pattern of pecking order hypothesis. The outcome of study clearly validates the significance of dynamic trade-off modeling for optimal capital structure. Research limitations/implications – As more data become available, the authors would extend this study to investigate the sectoral analysis to find how capital structure dynamics are different across sectors and how distinctive behavior of each sector differently affects the adjustment process toward target debt across each sector. In addition, sector-level and macro-economic factors could be incorporated to examine how external factors affect the firm’s speed of adjustment across sectors. Practical implications – The present study provides valuable insights for banking and corporate sector, mainly in Pakistan. The companies could take into consideration the firm-level factors which affect the adjustment process toward target debt. Likewise, the borrowing and lending procedures could be advanced by complying with dynamic mechanism of speed of adjustment. Furthermore, the findings of this research provide obstinate grounds for future research. Originality/value – Both the use of dynamic GMM adjustment model and sensitivity analysis along with Sargan test validate the health of instruments and values.

STUDI KETERKAITAN ANTARA DIVIDEND PAYOUT RATIO, FINANCIAL LEVERAGE DAN INVESTASI DALAM PENGUJIAN HIPOTESIS PECKING ORDER.

This study is aimed to examine the prediction of pecking order hypothesis in Indonesian. The hypothesis states that there is negative relationship between dividend payout ratio and investment. In addition, this study will learn the relationship between dividend payout ratio, financial leverage and investment. The dividend payout ratio determinants are financial leverage, investment, liquidity, profitability, size and variability of earnings. The financial leverage determinants are dividend payout ratio, investment, profitability, size, assets structure and variability of earnings. The determinants of investment are dividend payout ratio, financial leverage, sales growth, profitability, Q ratio and size. The data of this study is collected from 70 manufacturing companies as listed in the Jakarta Stock Exchange for the period of 1991 – 2000. The three stage least square simultaneous equation model is used to learn the relationship between dividend payout ratio, financial leverage and investment. In this study, it is found that there is no significant evidence that manufacturing companies in Indonesia tend to follow the pecking order hypothesis. In addition, it is found that the financial leverage gives a negative and significant influence on dividend payout ratio and vice versa; investment do not give a significant influence on dividend payout ration and vice versa; investment gives a positive and significant influence on financial leverage; and financial leverage do not give a significant influence on investment. Keywords: pecking order, dividend payout ratio, financial leverage, investment

Capital Structure's Determinants and Financial Crisis in Spain

Using annual data that records leverage levels of 77 non-financial firms in Spain prior and during the financial crisis, we demonstrate that tangibility, size, volatility, profitability, non-debt tax shield, growth opportunities and industry effect are factors that determine the capital structure of a company. Our results show that leverage is positively and statistically significant with size, non-debt tax shield and industry-effect. Also, our findings illustrate that profitability, growth opportunity and volatility are negatively and statistically significant with the debt issues on the balance sheet of these public traded firms. We discuss the extent to which these results are consistent with empirical evidence illustrated by prior studies with reference to the 2008 financial crisis. Finally, a negative correlation between leverage and profitability is consistent with pecking-order hypothesis rather than with static trade-off models.

Internal Cash Flows, Insider Ownership, Investment Opportunity, dan Capital Expenditures: Suatu Pengujian terhadap Hipotesis Pecking Order dan Managerial

The objectives of this study are to observe the impact of internal cash flows, insider ownership, and investment opportunity on the capital expenditure in two different theories. Those theories are: (1) the pecking order hypothesis and (2) the managerial hypothesis, tested in Indonesian case. On the one hand, the pecking order hypothesis postulates that managers can choose the level of capital expenditure to maximize the wealth of current shareholders without considering insider ownership in the company. On the other hand, according to the managerial hypothesis, managers whose ownership proportions are small tend to use higher level of internal cash flows to finance the capital expenditure than that which would maximize the wealth of current shareholders. This study is predicated on Griner and Gordon’s study (1995) and focused on manufacturing companies listed in BEJ. The data used in this study are taken from the period of 1993-1996. There are 64 companies chosen based on purposive sampling. The result of this study shows that the internal cash flows and the investment opportunity have positive and significant impact on the capital expenditures. However, the impact of insider ownerships on the capital expenditures is not significant. Eventually, this study substantiates the pecking order hypothesis. Keywords: Pecking Order Hypothesis, Managerial Hypothesis, Internal Cash Flows, Insider Ownership, Investment Opportunity, Capital Expenditures

Portfolio Liquidation and Security Design with Private Information

I consider the problem faced by an issuer holding a portfolio of securities that can be sold to raise cash. The issuer has private information that affects the value of all of the securities held, and so faces a lemons problem in the market for the securities. On the other hand, the issuer bears a retention cost if the securities are not sold. An equilibrium issuance strategy is characterized for the case in which the issuer’s information can be ordered in the sense that good news about one security is good news for all the securities held. The signaling equilibrium is shown to be unique subject to standard refinements. I also show that if the securities can be ordered in terms of their sensitivity to the issuer’s private information, then the issuance strategy is particularly simple: the issuer sells the least information-sensitive securities first. This result is then applied to standard debt and equity securities and is shown to confirm the Pecking-Order Hypothesis. Finally, the model also has implications for the optimal design of securities. In general, “splitting” a security into smaller tranches increases the issuer’s payoff. I also show that if the issuer can choose any monotone security design, then the optimal design is standard debt if the issuer’s information satisfies the hazard rate ordering.

Why do Firms Issue Equity?

In contrast to the existing empirical research on the pecking order hypothesis which has been largely confined to the United States and a few other advanced countries, this article attempts to test the hypothesis for an emerging economy through a case study of the Indian corporate sector. A well diverse sample of 556 manufacturing firms over the period 1997–2007 is used in the article to test the pecking-order hypothesis. The study finds strong evidence in favour of the pecking-order hypothesis—a result that stands startlingly odd against the most recent evidence against the pecking-order theory in developed countries (Fama and French 2005; Frank and Goyal 2003; Leary and Roberts 2004; Lemmon and Zender 2004). JEL Classification: G32

Cross-Border Mergers and Acquisitions in China: A Test of the Free Cash Flow Hypothesis

This research investigates whether Chinese cross-border investments have positive impact on shareholders wealth and whether the amount of bidders’ free cash flow influences the shareholder returns resulted from the acquisitions. The sample is based on 77 top Chinese cross-border investments during the years 2005-2009 with each deal value of minimum US$100 million. The assessments of acquisition abnormal returns are based on the event study methodology (Brown & Warner, 1985). Cross-sectional regression analysis is used to determine the bidding firms factors which significantly affect the returns. Factors are examined using OLS with White’s heteroscedasticity-corrected standard errors, since the assumption of homoscedasticity is likely to be violated. The study proves Chinese cross- border acquisitions result in positive abnormal returns which is consistent with synergy hypothesis. The amount of bidders’ free cash flow is also found to be marginally but positively associated with shareholders return which is consistent with Myers and Majluf’s pecking order hypothesis but unsupportive of Jensen’s free cash flow hypothesis.

How do CFOs make capital structure decisions? A survey of Greek listed companies

Purpose – The aim of this study is to investigate the corporate financing behaviour of nonfinancial Greek listed companies, focusing on how managers determine optimal capital structure. Design/methodology/approach – The study analyses the results derived from questionnaires submitted to the companies' chief financial officers (CFOs), using both descriptive and nonparametric statistics. Findings – The results broadly support the pecking order hypothesis over static trade-off theory. Firms listed on the Athens Stock Exchange prefer to use internal rather than external financing. A deeper examination of the systematic relationship between a number of variables and the financing decision provides tentative support for the existence of asymmetrically distributed information in the market and demonstrates a series of significant correlations among the determinative factors of a new long-term investment. Originality/value – This paper fills the existing gap between prominent theories of corporate leverage and empirical evidence. The questionnaire collects primary research data that are not available from public sources and reports CFOs' opinions and practices in the field.

Firms' speed of adjustment and rational financing behaviour: Malaysian evidence

Malaysian firms which are examined based on a dynamic framework appear to practise target capital structure and take into account certain firm characteristics in their capital structure decisions. These firms readjust instantaneously when they are off the target indicating low adjustment cost while the pecking order hypothesis seems to influence the financing decisions. Found to be over–levered most firms behave rationally by cutting down the amount of debt in their capital structure to reach the target. In terms of the proximity to the target, under–levered firms are found to be much closer to target than over–levered firms. This study contributes to the literature by identifying the rational financing behaviour and the proximity of Malaysian firms to target leverage. This indication of firms' proximity to target can help managers to outline and set the next steps to be taken in order to reach the target capital structure to maximise firm value.

Capital Structure Determinants: Evidence from Manufacturing and Services Sector Companies in Sri Lanka

This paper develops a preliminary study to explore the determinants of capital structure of Sri Lankan listed manufacturing and services sector companies using firm-level panel data for the period of 2003 – 2007. Profitability, Tangibility, Size, and Growth rate were used as independent variables, while leverage ratios such as total debt ratio, long-term debt ratio, and short-term debt ratio were the dependent variables.OLS dummy regression model was used here. The results revealed that only the profitability variable was statistically significant with leverage ratios (with total debt ratio and short-term debt ratio) at manufacturing companies. Meanwhile, all the selected variables, except tangibility were significantly related to at least one of the leverage ratios in services companies. The results of this study validate the prediction of pecking order theory in the case of profitability variables in both manufacturing and services companies. Also growth variable of services companies again confirms the pecking order hypothesis. However size variable of services companies confirms to the prediction of trade-off and agency cost theory.

The Determinants of Capital Structure in Emerging Capital Markets: Evidence from Serbia

1. Introduction Study of the capital structure and the effects of financial leverage in the so-called transition economies is still a matter of current interest. This problem is differently manifested in every country, depending on numerous factors (Thalassinos and Kiriazidis 2003; Thalassinos, Kiriazidis and Thalassinos 2006). The most important ones are the completeness of privatization process, the level of progress in capital market development, availability of various financing sources, the level of investor protection, legal stability and management quality. Each of these factors could affect certain firms with different intensity, depending on the country. The differences between developed and developing markets are significant (Thalassinos 2007; 2008). In contrast to developed markets, undeveloped markets are characterized by insufficient information transparency, poor functioning of primary market, low liquidity of secondary market and slow adjustment of prices to new information signals (Thalassinos et al., 2010). Under such circumstances, company management is often faced with inflexible capital structure, dominantly composed of capital and credit sources. Therefore, it is logical that usual capital structure determinants are differently manifested. The importance of studying the peculiarities of capital structure choices of companies operating in emerging and transition economies was highlighted for the first time by Cornelli, Portes and Schaffer (1998). In the last decade, a significant number of studies emerged aiming to explore the unique features of capital structure choices in Central and Eastern European (CEE) countries. However, to the best of the authors' knowledge, no empirical research concerning the impact of various firm-specific factors on capital structure choices of listed firms has been conducted in case of Serbia. Although Serbia, as one of European transition economies, shares many geographic and historical characteristics with other transitional European countries, the Serbian economy shows unique characteristics in terms of regulatory and infrastructure environment, development of financial market as well as the economic structure. The aim of this paper is to fill this gap in the literature by exploring the case of capital structure determinants in the Republic of Serbia. This study explores the factors determining capital structure choice of Serbian firms listed on the regulated market fragment of the Belgrade Stock Exchange in the period 2008-2011. More specifically, we try to answer whether firm-specific determinants that have been recognized in Central and Eastern European corporate settings are similarly leverage-correlated among Serbian companies. The contribution of the paper is two-fold and is reflected in extending the existing empirical literature to financial policy determinants in emerging and transitional economies and broadening the possibilities for cross-country comparison in the field of capital structure determinants. The structure of the paper is as follows. In Section 1 we give an overview of relevant theoretical and empirical evidence concerning capital structure determinants in European transitional economies. The data collection and research method are presented in Section 2. In Section 3 we discuss the empirical results of our study. Final Section provides conclusions, emphasize some limitations of the study and propose the objectives of future research. 2. Capital Structure Research in European Transition Economies Capital structure determines how a firm finances its operations and growth by using different sources of funds--debt and equity. Since the appearance of the seminal paper by Modigliani and Miller (1958), economic literature has recognized two important competitive theoretical models that aim to explain the capital structure decisions: the pecking order hypothesis and the static trade-off model. The first one finds its corner-stone in asymmetric information, while the second one is based on the existence of tax benefits associated with debt use, bankruptcy cost and agency cost. …

Trade-Off Or Pecking Order: Evidence From South African Manufacturing, Mining, And Retail Firms

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.

On the Informativeness of External Equity and Debt

According to the pecking order hypothesis, firms’ sources of finance can be ranked in order of preference as (i) internal equity, (ii) debt, and (iii) external equity. In reality, however, it is not unusual that a firm seeking funds for new investment issues common stock ( i.e. , external equity) even in a situation where the issuance of bonds or borrowing from the bank ( i.e. , debt) is also available. This paper focuses on the informational aspects of external equity and debt, and gives an explanation why firms occasionally prefer external equity to debt as a source of funds. Using a simple cheap-talk model, we show that external equity can be more informative to investors than debt, thus making external equity a more preferred source of financing than debt for entrepreneurs.