Pecking Order Model Research Articles

Capital structure of special-purpose governments

PurposeThe paper examines whether special purpose governments follow the pecking order model when raising capital, replacing firm equity in the original model with local intergovernmental revenues. Special purpose governments are a relatively underexamined component of state and local governments, and their capital structure choices have important implications for America’s aggregate fiscal health. This paper seeks to illuminate special purpose governments’ choices among available forms of capital.Design/methodology/approachTo address our research inquiry regarding whether special-purpose governments adhere to the pecking order theory, we narrow our focus to a specific group of transit entities. Our investigation utilizes data sourced from two distinct repositories: the United States Census of Governments and the National Transit Database. To facilitate integration of these disparate datasets, we establish a correspondence between them using the Federal Information Processing Standard and the transit identification number. Initially, our analysis employs maximum likelihood estimation, comparing these estimates to those generated by a naïve model. Subsequently, we derive parameter estimates through the application of a bivariate probit model.FindingsThe paper supports the pecking order hypothesis where internal funds are consumed first, debt is consumed next and IGR is consumed last. The results are robust and are not influenced by simultaneity bias.Research limitations/implicationsThe paper uses transit special purpose governments as the special purpose government of interest. These transit special purpose governments have high fixed costs that may inform their capital structure decisions relative to non-transit special purpose governments. Additionally, transit special purpose governments often have a profit-maximizing objective that may not uniformly apply to other special purpose governments, such as school districts, who lack such an incentive.Practical implicationsOur research should grab the attention of state and local politicians, voters, policy experts and scholars. Special-purpose governments, a key part of our governmental system, are on the rise. Understanding them better can guide decision-making on how to allocate resources, set policies and plan strategically. This knowledge boosts financial reporting quality, transparency, accountability and public confidence. Journalists can leverage our findings to ensure accurate and thorough reporting, fostering accountability and trust. Additionally, debt markets and analysts can factor this information into their risk assessments.Originality/valueThe paper enhances our understanding of how special purpose governments interact with existing models of corporate finance when making capital structure decisions.

Determinants of Capital Structure: Evidence from Securities Companies

The objective of the paper is to explore the factors that tend to affect the debt-equity choice of securities companies in Pakistan. Data on the variables used in the study was extracted from income statements and balance sheets of various securities companies registered with the SECP over a period of 14 years from 2008 to 2021. Panel data analysis is based on the use of econometric techniques (fixed effects and random effects models) for estimation of results. Results of the study demonstrate that securities companies prefer to finance their assets with equity which denotes 72.15% of their total assets. In contrast, the total liabilities designate 27.85% of their assets. Profitability appears to be positively related to total and long-term debt ratios. The firm size is positive while tangibility is inversely associated with total and short-term debt ratios. Liquidity is negatively linked to all proxies of capital structure while the firm efficiency appears to have a positive connection with the short-term debt ratio. Results of the study are consistent with the predictions of trade-off and pecking order models. The empirical outcomes of the research offer some useful policy implications for regulatory authorities, managers and shareholders of the Securities Companies in Pakistan.

Reassessing theories of capital structure: Empirical insights from companies listed in Vietnam

AbstractOver the past decade, the Vietnamese capital market has undergone a remarkable transformation, with a significant focus on its stock market that has displayed substantial expansion since 2012. This research delves into the impact of this market progression on the choices pertaining to capital structure made by companies listed in Vietnam. By analyzing a range of trade‐off and pecking order models and amalgamating them into a unified regression framework, we gauge their capacity to elucidate these decisions. Our study outcomes unveil that the trade‐off theory offers a more robust rationale for the capital structure determinations of Vietnamese companies, particularly during the post‐2012 period. Furthermore, we observe a notable increase in the pace of leverage adjustments made by Vietnamese companies post‐2012. Subsequent analysis indicates that this acceleration is primarily driven by overleveraged firms, as opposed to underleveraged ones. This study contributes valuable insights into the relationship between capital market development and capital structure choices within the Vietnamese context. It offers important implications for policymakers, investors, and corporate decision‐makers seeking to better understand and navigate the evolving dynamics of the Vietnamese capital market.

Financing decisions in private family firms: a family firm pecking order.

Family firms are one of the most ubiquitous forms of business organizations worldwide. Their survival and growth are thus not only crucial for the firms themselves but also for the overall economy. One of the factors that influence their survival and development are their financing decisions. These decisions are generally described through the pecking order theory. However, not much is known about the applicability of this theory in private family firms. Given the shortcomings (both theoretically and empirically) of the current literature, we analyze 1087 incremental financing decisions from 277 family firms to develop and test a specific family firm pecking order. We integrate the elements of the socioemotional wealth perspective to theoretically explain the preferred order and introduce family capital into the pecking order model. Our findings indicate that family firms first prefer internal financing, next debt financing, followed by family capital, and last external capital. We also find that SEW considerations play a role in this financing decision. Especially the retention of control over the firm and the aim to pass the firm to the next generation appear to play an important role in determining this order. These dimensions ensure that family firms try to avoid extra capital. However, when it is needed, they will opt for family capital over external capital. This paper thus provides more insight into the reasoning behind financing decisions in private family firms. How do family firms finance their investments? When looking for ways to finance their investments, firms have several options. According to traditional finance theories, they generally follow a so-called pecking order: they prefer to first use their internal funds, before turning to external financing. For family firms, the most ubiquitous form of business organization worldwide, two important aspects have been ignored in this research until now. First, socioemotional aspects influence decision-making in family firms and thus probably also financing decisions. Next, the business family itself can act as an external source of finance, which is not yet accounted for in the current pecking order model. In this research, we take these issues into account in order to develop-theoretically and empirically-a family firm pecking order. We investigate over a thousand financing decisions of 277 privately held family firms. Our results show that they prefer internal financing, followed by bank debt, family capital, and external capital. Especially the retention of control over the firm and the aim to pass the firm to the next generation appear to play an important role in determining this order. Our research thus indicates that future research should pay attention to the peculiarities of family firms when investigating their financing decision.

Determinants of choice between equity issuance, equity repurchase and debt issuance of South African companies listed on the Johannesburg Stock Exchange

Purpose: The introduction of dual decisions (such as the issue of shares and the issue of debt; the repurchase of shares and the repayment of debt; and share issues and share repurchases) has provided an order of preference of financing decisions influenced by company-specific attributes. The aim of this study is to investigate determinants of choice of South African companies listed on the Johannesburg Stock Exchange (JSE) between different financing decisions.Design/methodology/approach: Data were obtained from Integrated Real-time Equity System (IRESS), a reliable supplier of financial data. Data of 90 companies were analysed. A logistic regression model (fixed effect) was used, and multinomial logistic regression (fixed effect) was done using a generalised structural equation model.Findings/results: The research findings highlight the significance of the trade-off theory, the pecking order theory and models based on asymmetric information in elucidating financing decisions in a developing country. The findings extend empirical evidence of determinants of choice between equity issuance, equity repurchase, the no-transaction alternative and debt issuance decisions in South Africa’s emerging economy. The findings also suggest that South African companies listed on the JSE must evaluate company-specific variables and theories that correspond to such variables if they wish to make better financing decisions.Practical implications: The findings will help corporate decision-makers decide between equity issuance, equity repurchase and debt issuance. The findings will also help shareholders make better investment decisions.Originality/value: The article investigates the determinants of choice between four financing decisions and the no-transaction alternatives within the same framework.

Capitalization and profitability: applicability of capital theories in BRICS banking sector

The interrelationship between capitalization and profitability in banking sector of BRICS countries is studied with reference to existing five capital theories with the help of the ARDL and VECM/VAR models. These models are applied in the panel and individual settings on BRICS banking sector data from 2000 to 2020 to examine the presence of capital theories in the BRICS banking sectors. The study’s long-term empirical findings hold up the signalling and the bankruptcy cost hypothesis for the BRICS, Brazil, Russia, and India. Capitalization appears to be having a detrimental effect on profitability in China and South Africa, the agency argument is upheld. Profitability appears to have a considerable positive long-run influence on capitalization, which is consistent with Myers and Majluf’s (J Financ Econ 13:187–221, 1984) pecking order model for BRICS and Brazil. Profitability has a detrimental influence on capitalization in India and South Africa, corroborating the Modigliani and Miller (Am Econ Rev 48:261–297, 1958) and Miller (J Financ 32:1151–1168, 1977) notion. Although least significance is observed in most circumstances, the results of short-term prediction are comparable to those of long-run estimation. Both short-run and long-run evaluations of the capital-profitability link help in designing the “macroprudential” policies that demonstrate significance of our research.

The dynamic relationship between firms’ cash reserves and financial leverage: evidence from MENA emerging markets

PurposeThis paper investigates the impact of financial leverage on corporate cash holdings in the Middle East and North African (MENA) emerging markets.Design/methodology/approachThe author applies the dynamic modeling approach to data from nonfinancial firms listed in 10 MENA countries between 2010 and 2019. The empirical model avoids the shortcomings of the prior literature by including indicators of the dynamics of the financial leverage to account for its persistence in the corporate cash holdings reserves.FindingsThis research reports a significant negative relationship between corporate cash holdings and financial leverage. The results support the pecking order model, suggesting that leverage can be regarded as a substitute for holding a larger amount of cash and marketable securities. The author argues that the negative relationship between financial leverage and corporate cash holdings reinforces the precautionary motive to have internal cash reserves rather than external debt to support capital and investment activities by firms in the MENA emerging markets.Practical implicationsThe results of this research provide important insights into cash and capital structure management for nonfinancial listed firms in the MENA emerging markets. Specifically, the paper will help managers to understand the dynamic financial leverage determinants of holding cash in corporations in the MENA emerging markets and encourage policymakers to financially determine the corporate capital structure and cash holdings based on cost and benefits. Managing the firm's capital structure and cash holdings based on trade-offs between costs and benefits would enhance operating cash flow which may play an important role in creating value for shareholders.Originality/valuePrior studies have commonly been concerned with the determinants of corporate cash holdings, but few have investigated the dynamic financial leverage determinants of corporate cash holdings. This paper draws attention to this issue within the context of MENA emerging markets. To the authors' best knowledge, this is the first study that explores the relationship between cash holdings and financial leverage in MENA emerging markets.

Pecking Order and Static Trade-Off Models of Capital Structure: An Empirical Examination of Sri Lankan Listed Companies

This study examines the applicability of pecking order and static trade-off models of capital structure to Sri Lankan listed companies. Using data for 103 non-financial companies from 2007/08 to 2016/17, we test the two models employing the Generalized Method of Moment method. We find that the magnitude of the relation between the financing deficit and change in debt is very low, and firms finance only a small portion of their financing requirement through debt, providing weak support to the pecking order model. Although more profitable as well as larger firms prefer less debt inconsistent with the trade-off model, high-growth firms seem to use less debt consistent with the trade-off model, giving weak evidence to support the trade-off model as well. The pecking order model seems more applicable because listed companies consider external debt finance when meeting the financing deficit.

DYNAMICS OF DESIRE: GIFT GIVING AND RECIPROCITY IN ANCIENT GREEK HOMOEROTIC COURTSHIP COURTSHIP

The article addresses the problem of reciprocity in homoerotic relationships in classical Athens. According to the more traditional approach, the pecking ord er model ’’, these typically a symmetrical relationships almost inevitably involved humiliation of one of the partners, who literally or metaphorically assumed a passive and therefore u n manly role. Although more recent studies tend to underline the arti fici al cha racter of these schola rly reconstructions, they still fail to account for the nuances of ancient homoerotic courtship. I argue that some sources often used by scholars as reflec t ing negative attitudes towards homoeroticism may actually t estify to the existenc e of very clear rules of highly valued and praised behaviours of passive partners. T h ese rules formed an implicit grammar of social actions but were never explicitly codified.

Women executives and financing pecking order of GEM-listed companies: Moderating roles of social capital and regional institutional environment

This paper investigates the financing options of female executives within China’s unique environment. We examined 154 GEM enterprises listed on the Shenzhen Stock Exchange from 2009 to 2016. The data were analyzed using statistical procedures including multilevel regression analysis based on the existing financing pecking order models. Empirical evidence shows that women executives are less likely to use internal and debt financing. In terms of internal financing willingness, social capital and external institutional environment have negative and positive moderating effects respectively. In terms of debt financing willingness, social capital has a positive moderating effect. In addition, a poor external institutional environment has an amplifying effect on the moderating role of women executives’ social capital. Our study enriches current research on women executives' financing preferences which are limited to areas such as debt, equity financing and risk appetite and provides enlightenment for companies and women executives to improve their competitive advantages, and for government to optimize the external institutional environment.

Do Capital Structure Models Square with the Dynamics of Payout?

We explore whether theoretically the target leverage and pecking-order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment toward the NDR target facilitates payout smoothing. Under strict pecking-order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.

Do Capital Structure Models Square with the Dynamics of Payout?

We explore whether theoretically the target leverage and pecking order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment towards the NDR target facilitates payout smoothing. Under strict pecking order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.

Firm Size, Asset Tangibility, Growth, Volatility, Dividends and the Capital Structure of Nigerian Quoted Firms

Empirical work on capital structure in emerging markets like Nigeria has been sparse and met with low explanatory power. This study investigates the determinants of capital structure in Nigeria. The population of study comprises all non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2014 out of which 50 companies that met the minimum data criteria were utilized. Using panel data least squares regression, modified to weighted (cross section- and period-) models, the research documents the following findings. First, the factors that exert positive influence on corporate borrowing include firm age, intangible assets and expected inflation while those factors that exert negative influence on capital structure include tangible assets, growth, size, volatility of earnings, profitability, liquidity, dividend-paying status and uniqueness of industry. The results were, at best, mixed with respect to the portability of pecking order, target adjustment, trade-off, agency and market conditions models. The pecking order beats the trade-off model based on the signs of coefficients of firm-level attributes. In order words, asymmetric information explains why smaller, less profitable, less liquid firms with more risky intangible assets and which are low dividend-payers end up relying primarily on debt financing and vice versa. The study recommends the use of leases for financially- and collateral-constrained firms as well as instruments that facilitate information symmetry in financial markets.

Dynamic capital structure under changing market conditions in the oil industry: An empirical investigation

We study dynamics of capital structure in the oil sector, which has witnessed dramatic changes in the market conditions, such as significant changes in the price of oil, crucial reforms in legislation, and reduced access to credit over the last decade. Our analysis is focused on testing the main predictions of the tradeoff, pecking order, and market conditions models under a changing market environment. Our main contribution is to incorporate firms' heterogeneities related to indebtedness levels, share issues, long-term and short-term indebtedness within the capital structure analysis through the use of quantile regression as well as considering time dynamics. We identify general patterns in the sector, such as a preference in the oil industry for financing changes in investment through the issuance of new debt (mostly long-term debt). Generally, we find a changing capital structure across time and firms’ indebtedness characteristics. For example, oil firms with relatively high growth rates of new debt issuance are much more sensitive to changes in investment than firms with relatively lower rates of new debt issuance in a given year. Our results stress the importance of considering both time and cross-sectional asymmetries when explaining funding mechanisms adopted by a firm. Our study emphasizes the importance of time-varying aggregate factors on capital structure choices made by energy firms and therefore highlights the importance of policies that impact funding available for energy firms, independently of the idiosyncrasies that characterize their capital structure decisions. It also shed light on the importance of policies such as the establishment of anticyclical capital buffers in the energy industry.

An Examination Pecking Order versus Trade-off theories of Capital Structure: Evidence from Asia Pacific Global Firms

Purpose - The objective of this study is to investigate which of the two competing theoretic frameworks, pecking order theory or trade-off theory, better explains the corporate debt behavior in the Asia Pacific region. Design/Methodology/Approach - This is a theory of corporate debt behavior that better describes the Asia Pacific region. Firm-specific factors have been analyzed by performing the OLS regression method on a sample of 500 Asia Pacific region listed non-financial companies for the period 2001-2017. Findings - Results first revealed that the debt ratio is negatively related to profitability opportunities, non-debt tax shield, and the firm’s life cycle. Second, the debt ratio is positively related to asset tangibility and the firm’s size. Third, there was no statistically significant relationship between effective tax rate, growth, and risk on debt. Research Implications - Overall, the results show that the financing pattern of Asia Pacific region firms is consistent with the pecking order model. In practice, managers in those companies prefer internal financing to external financing and their behavior may deliver a good signaling effect on investors to confirm an improved profitability and more investment in research and development leading to better firm values.

Türkiye’de Hizmet Firmalarının Finansal Kaldıracını Etkileyen Faktörler Üzerine Ampirik Bir Araştırma

This research investigates the factors affecting the financial leverage of 52 service firms listed on Istanbul Stock Exchange during the period from 2008 to 2017. Using Ordinary Least Squares (OLS) regressions, our results indicated that, as assumed by the pecking order model, leverage increases with investment opportunities and decreases with profitability, liquidity and tangibility. Furthermore, we find that larger firms tend to have high leverage. However, contradicting the trade-off model, non-debt tax shields are positively and significantly related to leverage.

Corporate cash holdings and financial crisis: evidence from the emerging market of Greece

This paper investigates the determinants and implications of cash holdings during both a recessionary and a growth phase of the Greek economy. Using a sample from 2003 to 2014, we find that, on average, Greek firms hold 13.8% of their total assets as cash and cash equivalents. We build upon the theoretical underpinnings of cash holdings determinants and provide evidence generally supportive of both a static trade-off model and pecking order model. The empirical results indicate that the cash ratio is positively associated with cash flow to assets, capital expenditures, industry cash flow volatility, and dividend payment. In contrast, corporate leverage, net working capital ratio, firm size, and loss are negatively related to cash ratio. This study highlights the importance of formulating additional regulatory actions and accounting policies to shield markets from a looming global shock.

Corporate cash holdings and financial crisis: evidence from the emerging market of Greece

This paper investigates the determinants and implications of cash holdings during both a recessionary and a growth phase of the Greek economy. Using a sample from 2003 to 2014, we find that, on average, Greek firms hold 13.8% of their total assets as cash and cash equivalents. We build upon the theoretical underpinnings of cash holdings determinants and provide evidence generally supportive of both a static trade-off model and pecking order model. The empirical results indicate that the cash ratio is positively associated with cash flow to assets, capital expenditures, industry cash flow volatility, and dividend payment. In contrast, corporate leverage, net working capital ratio, firm size, and loss are negatively related to cash ratio. This study highlights the importance of formulating additional regulatory actions and accounting policies to shield markets from a looming global shock.

An approach to corporate capital structure of Southeast Asian countries

This study investigates the determinants of capital structures of listed firms in Southeast Asia, including Vietnam, Thailand, Indonesia, Malaysia, the Philippines and Singapore, between 1995 and 2014. Based on the most up-to-date data from Thompson Innovation, we employ feasible generalised least squares (FGLS) to test funding behaviours of individual countries and the whole region. Empirical evidence supports neither the pecking order theory nor the trade-off model as the best-fit framework to understand the capital structures of firms in Southeast Asia, though the trade-off model has more precise predictions of the data than the pecking order model. Besides, the outcomes demonstrate that understanding firm nationality is necessary to determine countries' conventional corporate capital structure models.

Firm Size as Moderator to Capital Structure-Its Determinants Relations

Objective – Capital structure policy is a strategic decision related to the selection of funding sources. The best mixed of capital structure will produce a low cost of capital, which in turn can maximize the value of the company. This study aims to determine the effect of company size as a moderator on the relationship of capital structure and its determinant factors on manufacturing companies in Indonesia and Malaysia. Methodology – Data were collected from 40 manufacturing companies listed on the Indonesia Stock Exchange and 130 manufacturing companies listed on the Bursa Malaysia during 2008-2017. This study will analyze the determinants of capital structure consisting of liquidity, profitability, tangibility and efficiency as well as company size as a moderating variable. The research method uses panel data regression. Findings – The company size provides a moderating effect on the relationship between capital structure with liquidity, profitability, tangibility and efficiency, and this moderation effect is strengthened in large companies in Indonesia. Instead, this moderation effect is weakening for large companies in Malaysia Novelty – Research shows that the "modified pecking order" model is better able to explain the capital structure, policies of manufacturing companies in Indonesia and Malaysia compared to the traditional pecking order and trade off theory models. Type of Paper: Empirical Keywords: Capital Structure; Pecking Order Theory; Trade Off Theory; Manufacturing Company; Moderating Effect. Reference to this paper should be made as follows: Sari, M; Netti, S.N; Sulastri, S. 2019. Firm Size as Moderator to Capital Structure-Its Determinants Relations, J. Fin. Bank. Review 4 (3): 108–115 https://doi.org/10.35609/jfbr.2019.4.3(4) JEL Classification: G23, G30, G32.