Pecking Order Theory Research Articles

Analysing the Impact of Capital Structure on Firm Value: A Study in Corporate Finance

Abstract: This study investigates the relationship between capital structure and firm value across various industries. Using a cross-sectional quantitative analysis, the research examines how different levels of debt, equity, and financial leverage affect firm value, measured by market capitalization and Tobin's Q. The findings suggest that firms with moderate debt levels experience enhanced firm value, benefiting from the tax shields provided by debt without incurring significant financial distress. However, excessive financial leverage negatively impacts firm value, as firms face increased risk of financial instability. The study supports key theories such as the trade-off theory and pecking order theory, demonstrating that capital structure decisions are influenced by factors such as firm size, profitability, and industry characteristics. The implications for corporate managers and investors include optimizing debt-equity balance to maximize firm value while managing financial risk. Future research should focus on industry-specific dynamics and longitudinal analyses to further explore these relationships.

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.

Initial Public Offering (IPO) and Value Aggregation: a Systematic Literature Review

Objective: The objective of this study is to conduct a systematic literature review on Initial Public Offerings (IPO) and value aggregation, identifying the key articles and authors who investigate the topic. Theoretical Framework: The theoretical framework is based on life cycle, market timing, and pecking order theories, highlighting the benefits and risks of IPOs for companies, such as raising capital and increasing market value. Method: The method used was a systematic review, based on the Web of Science, focusing on articles about IPOs and value creation. Stages such as research operationalization, application of filters, and bibliometric analysis were followed. Results and Discussions: The results indicate a significant increase in the number of publications after 2007, with emphasis on the seminal work of Loughran and Ritter. The discussions reveal that most research focuses on pricing and governance aspects, with few investigations on financial value aggregation. Research Implications: The research implications suggest the need for future studies focusing on the financial impact of IPOs, especially in emerging markets. Originality/Value: The originality and value of this work lie in the systematization of a vast literature on IPOs and the identification of gaps for future research

The Applicability of The Pecking Order Theory in The Digital Economy

The Peck Order Theory (POT), proposed by Myers and Majluf in 1984, posits that firms prioritize their sources of financing based on the principle of least resistance, starting with internal financing, followed by debt, and ending with equity as a last resort. In the context of the digital economy—which is defined by new finance mechanisms and technical advancements like big data, blockchain, crowdsourcing, and artificial intelligence (AI)—this study investigates the applicability and relevance of POT. This study investigates how these contemporary tools impact conventional financing behaviors and preferences through an extensive literature review.The findings suggest that while POT remains a powerful framework, its application in the digital age needs to be modified to account for the reduced information asymmetry and increased efficiency brought about by digital innovations.

FINANCIAL INCLUSION AND PERFORMANCE OF TOP 100 SMALL AND MEDIUM ENTERPRISES IN KENYA

Access to services such as credit, insurance, and savings enables SMEs to invest in growth, innovation, and operational efficiency. SMEs leveraging financial inclusion can enhance their revenue generation, cash flow management, and overall profitability. The study sought to find out what impact finance inclusion has had on the performance of Kenya's top 100 SMEs. This study was guided by finance intermediation theories, technology acceptance theory, TAM signal theory and pecking order theory. The study1was carried1out on the basis of a descriptive research design. The target population consisted of top 100 medium size enterprises in Kenya as shown in the annual survey carried out by KPMG and nation media group in the years 2020. Respondents ware financial officers from Kenya's top 100 mid-sized companies. Stratified sampling was used to interview respondents based on company category. Respondents were selected using a purposeful selection process. Data1was collected using structured questionnaire. A pilot survey was conducted with 10 respondents, but the final survey did not include these respondents. Validity of research instruments was measured using content validity. The study examined the effects of micro savings, micro credit, micro insurance, and digital banking on the performance of Kenya's top 100 SMEs, revealing that tailored financial products significantly enhance operational efficiency and growth. Findings indicated that micro savings improve financial stability, while flexible repayment options for micro credit support sustainable business practices. Additionally, awareness and customized solutions for micro insurance products were found to bolster risk management among SMEs. Digital banking was highlighted as a critical enabler of faster transactions and better cash flow management. The conclusions suggest that targeted financial services and educational initiatives are vital for empowering SMEs to optimize their performance. Recommendations include developing customized financial products, enhancing digital banking infrastructure, and providing financial literacy training to improve overall business resilience and sustainability.

Financial Synergy for Sustainable Success: Optimizing Management, Investment, AI, and Risk SMEs in Bali

In the context of globalized and environmentally conscious business landscapes, this study investigates the intricate relationships between investment decisions, risk perception, artificial intelligence (AI), and sustainable success in small and medium enterprises (SMEs) in Bali. Employing a quantitative approach, the research explores the mediating role of investment decisions using theoretical frameworks such as the Triple Bottom Line, Pecking Order Theory, Trade-Off Theory, and Prospect Theory. Results from a sample of 150 SMEs reveal significant direct effects and correlations, with investment decisions mediating between AI, risk perception, and sustainability. Managerial implications emphasize strategic AI integration, robust risk management, and a balanced approach to investment decisions for sustainable success. While limitations include sample size constraints, future research directions suggest longitudinal and qualitative studies, exploration of sectoral variations, and assessing the impact of emerging technologies on sustainability decisions. This study provides actionable insights for companies navigating the complexities of sustainable decision-making and underscores the imperative for businesses to foster a culture of adaptability and innovation. By embracing these insights and cultivating a forward-thinking approach, companies can not only optimize their current sustainability strategies but also position themselves strategically to thrive in an ever-evolving business landscape.

Effect of Current Asset Structure on Financial Performance of Non-Financial Firms Listed at Nairobi Securities Exchange

The effect of current asset structure on the financial performance on organizations cannot be underrated. This study focused on non-financial firms listed at the Nairobi Securities Exchange in Kenya. The study used a census survey which involved the consideration of the entire population of the study. The research study was anchored on trade-off theory, agency theory and pecking order theory. The research study generally followed a longitudinal research design. The positivism research philosophy was adopted in the study. The unit of analysis comprised the non-financial firms listed at the Kenyan NSE between years 2011 to 2020 with a focus on 30 non-financial listed companies. The study applied both descriptive statistics and multiple regression methods in analysing the data collected. The study established that current asset structure was significantly influencing the financial performance of listed nonfinancial firms in Kenya.

Capital Structure and Performance of Small and Medium Enterprises: Empirical Evidence from Tanzania

This research delves into the effects of capital structure on the performance of small- and medium-sized enterprises (SMEs) in Tanzania. The research is predicated on 276 SMEs in Tanzania. Panel data including 828 observations for the years 2017–2019 were used. To evaluate the models, an ordinary least-squares test was employed. Return on capital employed (ROCE), return on equity (ROE) and return on assets (ROA) were employed to measure the SMEs’ performance. The findings reveal that total debt, short- and long-term debts have a negative effect on ROCE, ROE and ROA. Generally, the results uphold the Pecking Order Theory, which postulates a negative correlation between debt and firm performance. The results imply that firms with large debt levels have lower performance. This study recommends that SMEs’ financial managers should choose their capital structure carefully by avoiding excessive debt, in order to increase the firm’s overall worth, thereby maximizing firms’ performance. The investigation adds to earlier research by giving another point of view in Tanzania through analysing SMEs’ capital structure and performance by utilizing manufacturing sectors in their entirety while employing a panel data analysis.

Effect of Bank Size on Earnings Retention for Investment by Commercial Banks in Kenya

The Kenyan economy has continued to register dismal performances in the last few years and banks can play a facilitative function because of their intermediary role. The study sought to find out if the size of a commercial bank has any influence on its level of earnings retention for investment. The retention of earnings by a bank each financial year can have critical importance because it provides a source of funds for investment. The findings of the study are helpful to the management of commercial banks in education to shareholders. The study was anchored on the pecking order theory. The bank size parameters were cash at Central Bank of Kenya and property assets, net borrowed funds, investor funds, and the paid dividend. Though the total banks' population was 39, the study involved 36 banks as units of analysis. To test the impact of size on earnings retention in commercial banks in Kenya, a linear regression model was run. Analysis of the data revealed that 83 % of banks’ earnings retention is influenced by cash at CBK and property assets, net borrowed funds, investor funds, and paid dividends. The results pointed out that, cash at CBK and Property assets, net borrowed funds, and investors’ funds have a positive significant impact on earnings retention while paid dividends have an insignificant impact on earnings retention. Any commercial bank intending to expand its operations by use of retained earnings should work towards increasing variables with significant positive influence or decreasing the parameters with significant negative influence. By this, the commercial banks in Kenya will maximize utilization of the cheapest source of funds for investment and this will also lead to increased earnings due to reduced expenses related to capital acquirement from other sources.

The Relationship between Retained Earnings and Financial Performance of Listed Non-Financial Firms: An Econometrics Examination

Internal funding sources such as retained earnings provide minimize information asymmetry in addition to being cheap and convenient for ailing firms such as listed non-financial firms trading at the Nairobi Securities Exchange (NSE). Research has however failed to do document precisely how the potential inherent in retained earnings can be exploited to improve financial performance of such firms in the long run. Therefore, this research conducted among 42 non-financial firms listed on the exchange explores the relationship between retained earnings and financial performance from an econometrics perspective. The study is anchored on the Pecking Order Theory, and employs the panel data research design founded in the positivist research paradigm, with data covering the time interval 2016 to 2022 inclusive. Data is sourced purposively from the annual reports of the non-financial sector, including agricultural firms, automobiles and accessories, commercial & services, construction & allied, energy & petroleum, insurance, investment, investment services, manufacturing & allied, telecommunication, and real estate investment trust. The research uses the fixed effects model under panel regression to show a positive and significant relationship between retained earnings and financial performance, and particularly the ultimate direct influence that retained earnings have on financial performance of listed nonfinancial firms. Therefore nonfinancial sector stakeholders should seek to leverage retained earnings to enhance financial performance and achieve resilience in the volatile market conditions, while scholars should seek to enhance external validity of these findings by replicating them in other study contexts. Keywords: Information asymmetry, retained earnings, financial performance, nonfinancial firms, Securities exchange, Econometrics, Panel data.

A Study of the Capital Structure Characteristics Across Diverse Industries

The matter of how a company's capital is structured is frequently discussed in literature related to this topic since 1950s. Nevertheless, theories on optimal capital structure are categorized into different approaches, with their features often controversial and conflicting. The aim of this article is to provide a comprehensive review of the characteristics as well as determinants of the capital structure in capital-intensive, labor-intensive, and tech & healthcare industries in different countries, based on two main theories in capital structure- pecking order theory and static trade-off theory. The paper also highlights the important relationship between financial leverage and the companys performance and therefore tries to find the optimal capital structure. The study is composed of two main sections. The first part is to organize the previous study and various definitions of capital structure and some relevant theories. The second part shows how features of the leverage ratio vary across industries and how companies create value out of it. This paper proposes, after examining previous literature, that the factors influencing the optimal capital structure vary among companies depending on their characteristics. Companies in various sectors have their preferences to make the most use of debt and equity. It is hard to generalize a specific optimal ratio that suits every corporation.

Faktor Faktor Yang Mempengaruhi Struktur Modal

Capital is the main problem for business actors or companies. Companies need additional capital to develop products so they can compete with other similar companies. This research aims to analyze what factors influence the capital structure of manufacturing companies listed on the IDX for the 2020-2022 period. This research uses a pecking order theory and trade-off theory approach to build arguments between the independent variable and the dependent variable. The sample obtained from the purposive sampling technique was 42 companies over 4 years (126 observation data). The data analysis technique uses multiple linear regression analysis. The research results prove that company size has a significant negative influence on capital structure so that the hypothesis is rejected, as well as what happens to profitability on capital structure which also rejects the hypothesis, namely that profitability has a negative and insignificant effect. However, the results of the relationship between asset structure and capital structure have a significant positive influence so that the hypothesis is accepted. The coefficient of determination value proves that it is concluded that 18.3% of the independent variables, namely company size, asset structure and profitability in this study, can influence the dependent variable, namely capital structure, while 81.7% can be explained outside the variables in this study.

Capital structure in Latin America: institutional and macroeconomic effects

PropósitoEste estudio analiza la influencia de los factores institucionales y macroeconómicos, además de los factores a nivel de empresa, en la estructura de capital de las empresas industriales cotizadas latinoamericanas (LATAM). El objetivo es proporcionar evidencia empírica sobre las empresas latinoamericanas desde (1) la perspectiva de las teorías tradicionales trade-off y pecking order, y (2) desde los enfoques que introducen el impacto de los factores institucionales y macroeconómicos en el análisis.Diseño/metodología/enfoqueEl análisis empírico adopta una metodología econométrica, utilizando datos de panel de empresas de Argentina, Brasil, Chile, Colombia, México y Perú, de 2008 a 2018.HallazgosLos resultados indican que, además de las características a nivel de empresa, las características institucionales y macroeconómicas de los países influyen en la estructura de capital de las empresas latinoamericanas.Limitaciones/implicaciones de la investigaciónEl estudio presenta algunas limitaciones, principalmente se centra en empresas cotizadas provenientes de solo seis países de LATAM, debido a la falta de datos. Sería recomendable realizar estudios similares con factores de gobierno corporativo, con empresas familiares y PYMES.Implicaciones prácticasLos resultados pueden servir de referencia para los agentes económicos y profesionales, animándolos a considerar la evolución de las variables institucionales y macroeconómicas a la hora de tomar decisiones. Académicamente, nuestros hallazgos verifican la validez de las teorías convencionales y la relevancia de incorporar variables institucionales externas en el marco de la estructura de capital.Originalidad/valorLa importancia de esta investigación radica en analizar la estructura de capital de empresas en un área geográfica poco explorada, LATAM, incluyendo factores institucionales y macroeconómicos y utilizando la nueva base de datos Orbis.

Effect of Tax Policy Changes on Corporate Investment Decisions in Saudi Arabia

Purpose: The aim of the study was to assess the effect of tax policy changes on corporate investment decisions in Saudi Arabia. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: The study indicated that reductions in corporate tax rates generally lead to increased investment by companies. Lower taxes can free up funds that businesses then use for capital expenditures, research and development, and expansion projects. Conversely, higher tax rates may discourage investment, as they reduce after-tax profits and make certain projects less economically viable. However, the relationship between tax policy and investment decisions is complex and can vary depending on factors such as the overall economic environment, industry dynamics, and the specific details of the tax changes. Overall, though, there is evidence to suggest that tax policy plays a substantial role in shaping corporate investment behavior. Implications to Theory, Practice and Policy: Pecking order theory, agency theory and neoclassical investment theory may be used to anchor future studies on assessing the effect of tax policy changes on corporate investment decisions in Saudi Arabia. Policymakers and corporate leaders should collaborate to design tax policies that align with strategic investment objectives, fostering economic growth, innovation, and market competitiveness. The findings from research studies on the effect of tax policy changes on corporate investment decisions can inform evidence-based policymaking aimed at optimizing tax frameworks for economic resilience and dynamism.

Unlocking the Link Between Firm Level Factors and Capital Structure: "An Industrial Analysis"

This study investigates the influence of firm level factors on capital structure. The determinants of the study are profitability, liquidity, cash gap, cash productivity of asset and firm valuation that effect the capital structure. The population used is the construction sector of Pakistan and the cement sector was selected as the sample size for period of 2016 to 2021. The random effect model is operated as data analysis technique to empirically examine the relationship of variables. The findings show that all predictors influenced the capital structure. The results obtained infer that profitability and cash gap are positively associated with capital structure. Whereas, liquidity, cash productivity of assets and firm valuation is negatively related with capital structure. The two fundamental theories of capital structure, trade-off theory and pecking order theory are used in this study. It emphasizes the significance of probability in determining the capital structure decisions as increased debt usage can lead to tax deductions due to interest payments. The aim is to enhance the company's profits, which in turn will raise the company's worth through optimal selection of capital structure. Our study recommends that companies in construction sector should increase their profitability and manage cash gaps efficiently to leverage positive impact on capital structure and to regularly evaluate form valuation to ensure it aligns with capital structure decision.

Impact of Corporate Governance and Capital Structure on Firm Performance: A Case of Public listed Companies

This study investigates the intricate relationship between corporate governance, capital structure, and firm performance in the context of listed firms. A quantitative research approach was employed, utilizing data that includes Return on Assets (ROA), leverage ratios as indicators of capital structure, and corporate governance variables such as board composition, executive compensation, and regulatory compliance. Regression analysis was conducted, accounting for control variables such as firm size, industry sector, and macroeconomic conditions. The results indicate a positive relationship between corporate governance and ROA, suggesting that stronger governance mechanisms are associated with higher profitability, consistent with findings from previous studies. Conversely, the analysis reveals a negative relationship between capital structure and ROA, indicating that higher leverage is linked to lower profitability, thereby supporting the pecking order theory. However, the study's methodology presents certain limitations, including reliance on cross-sectional data, the potential for omitted variable bias, and limited generalizability within the Pakistani context. While the findings offer valuable insights for policymakers, practitioners, and scholars in the fields of corporate finance and governance, caution should be exercised when generalizing these results to countries with different institutional contexts and market structures.

FACTORS AFFECTING THE FINANCIAL PERFOMANCE OF AGRICULTURAL COMPANY’S: EVIDENCE FROM THE INDONESIA STOCK EXCHANGE

The Indonesian economy is primarily based on the agriculture sector, even growing when other sectors are down. This role is supported by the existence of agricultural companies that run businesses with profit-oriented goals. The company's ability to generate profits reflects the company's financial performance and is influenced by various factors. Using panel data for the years 2015–2021 from 17 agricultural companies listed on the Indonesia Stock Exchange (IDX), this study aims to determine the influence of internal and external factors on the financial performance of agricultural companies in Indonesia. The results of static panel data regression found that the company's growth and the dummy of the Covid-19 pandemic had a positive and significant effect on the company's financial performance which was proxied through the profitability ratio (ROA). Debt asset ratio (DAR), COGS/sales, and exchange rate have a negative and significant effect on ROA. In general, these results confirm the pecking-order theory in the relationship between ROA and DAR, as well as the ability of agricultural companies in Indonesia to survive in the conditions of the Covid-19 pandemic. The implication for improving the performance of agricultural companies in Indonesia is that companies must be able to reduce the percentage of production costs (COGS/sales) and implement an optimal capital structure mix. Companies are also required to carry out good risk management to anticipate exchange rate fluctuations.

Firms’ Capital Structure during Crises: Evidence from the United Kingdom

This study was conducted using the dynamic panel two-stage least squares system generalized methods of moments (2SLS-system GMM) to examine how UK companies made capital structure decisions during the COVID-19 pandemic. Contrary to expectations, firms opted to reduce their debt exposure during the pandemic. Tobin’s Q was the most significant determinant of capital structure, as it mitigated total debt by 0.25% during the pandemic. This result aligns with the pecking order theory, suggesting that firms prefer internal financing over debt. Simultaneously, combined scores (ESG) and the decomposed environment (E), social (S), and governance (G) scores individually and paired with the COVID-19 dummy negatively affected short-term debt by 0.012%, 0.015%, 0.0068%, and 0.00434%, respectively. This study’s results highlight the significance of firms adopting less debt-heavy policies during periods of heightened uncertainty to effectively manage financial risk. This result underscores the importance of prudent financial risk management strategies for navigating the challenges posed by sudden crises. Our findings suggest that a complex interplay of factors influences capital structure decisions during crises, with debt reduction and prudent risk management emerging as critical strategies.

DETERMINANTS OF CAPITAL STRUCTURE IN ENERGY SECTOR: EVIDENCE FROM BORSA İSTANBUL

This study aims to examine the determinants of capital structure in the energy sector of Turkey and their relation to relevant theories. The panel data analysis method was used to analyze annual data from 8 energy companies operating in Borsa Istanbul between 2014 and 2021. Results of the analysis showed that while the median debt ratio on a sector basis affects leverage positively; asset structure, growth opportunities, profitability, liquidity, industrial production and distribution index, and GDP annual growth variables negatively affect leverage. No significant relationship was found between the size of the business, non-debt tax shield, inflation, tax revenue, and leverage. It has been noted that the findings are in line with the previous studies, and the capital structure of the Turkish energy sector is generally compatible with the pecking-order theory.

Capital structure and the firm performance nexus: the moderating and mediating roles of agency cost

PurposeThe purpose of this study is to examine the linear and non-linear relationship between capital structure (CS) and firm performance (FP) and the moderating and mediating roles of agency costs in the CS-FP nexus.Design/methodology/approachThis study used static and quadratic panel data regression models to examine the linear and non-linear relationships and structured equation models to analyze the mediating effect of agency costs in the CS-FP nexus of 38 listed non-financial Mauritian firms from 2009 to 2019.FindingsLeverage has a significant negative effect on FP supporting the pecking order theory. Agency costs are significantly and positively associated with FP. There is a strong non-linear relationship between leverage and FP supporting the trade-off and agency cost theories. Agency costs are an important moderator and mediator in the CS-FP nexus. Overall, the sensitivity analyses showed that the results were robust.Practical implicationsFirms need to carefully consider the levels and types of debt and equity in their CS involving the use of dynamic strategies to adjust CS in response to changing economic conditions and FP. The moderating effect of agency costs may guide firms in optimizing CS and may contribute to corporate governance discussions, emphasizing the importance of aligning interests to foster sustainable business practices.Originality/valueThis study adds to the extant literature by providing new evidence on the non-linear relationship between leverage and FP and the moderating and mediating roles of agency costs in the CS-FP nexus in emerging capital markets, where such studies are rare.