Pecking Order Theory Research Articles

Finance Option and Growth Prospect of Production Based Firms in Nigeria: A Post-Financial Crisis Analysis

Purpose: Firms' funding strategies have grown more fluid and unpredictable since the global financial crisis of 2007, particularly for developing nations like Nigeria. This research looked at the years 2010–2022, after the financial crisis, to see how different types of financing affected the expansion opportunities for production-based businesses in Nigeria. In particular, the research looked at how different types of financing—equity, debt, and retained earnings—impacted the expansion of assets for Nigerian production-based businesses. Design/Methodology/Approach: A panel regression estimate was used to evaluate the data gathered from the financial accounts of fifteen production-based enterprises. Findings: The most effective and reliable estimate, which was a random effect, showed that total equity had a positive and statistically significant influence on asset growth rate. Asset growth rates were negatively and insignificantly affected by total debt and retained earnings, according to the result. Compared to the internal option (retained earnings), this study found that the external source of finance option—particularly equity—has a strong propensity to accelerate the rate of expansion of a production-based corporation in Nigeria. Original/Value: A post-financial analysis of production-based enterprises is the innovative aspect of the study that aligns with Pecking Order Theory's postulates about the relationship between finance and economic prospects in developing nations like Nigeria. Practical implications: Consequently, producing organizations should include whole equity in their financing options for growth enhancement rather than seeing it as a last resort.

A computational approach to transparency in corporate governance across borders

This article delves into the intricate relationship between information asymmetry and financial reporting comparability, with a particular emphasis on earnings management (EM) in cross-border corporate governance settings. Utilising data from 2,475 non-financial firms across 19 frontier markets from 2003 to 2019, the study employs pooled OLS, fixed effects, and between-effects models to scrutinise the impact of factors like financial comparability, reputable auditing, analyst coverage, and legal systems on earnings management. The findings reveal that enhanced financial comparability, facilitated by strong governance mechanisms such as reputable auditors and analyst coverage, leads to a reduction in earnings management and information asymmetry. Interestingly, leverage does not serve as a constraining factor as commonly believed. The results contribute to the growing body of literature on the application of data science, and challenge the pecking order theory (POT), while lending support to the knowledge-based view (KBV)and convergence theories, thereby offering valuable insights into the role of corporate governance in mitigating information asymmetry.

The Influence of Capital Structure on the Financial Performance of Small and Medium Enterprises in Mitooma District, Uganda

Small and medium enterprises (SMEs) are pivotal for a nation's economic growth, representing 90% of global businesses and generating 50% of job opportunities. In Uganda, this sector employs approximately 2.5 million individuals and contributes 18% to the GDP. Despite this significant impact, 45% of Ugandan SMEs face imminent collapse due to financial hurdles. Consequently, this study aimed to explore how capital structure influences the financial performance of SMEs in Mitooma District. The objectives were to scrutinize the impact of equity capital, debt capital, and retained earnings on SMEs' financial performance. Grounded in the Pecking Order Theory and Trade Theory, the study followed a quantitative research approach employing a descriptive research design. With a population of 836, a scientifically determined sample of 271 was selected through random and purposive sampling methods. Data collection involved a validated and reliable questionnaire. Using regression analysis through SPSS, the study found that the model provided a robust level of prediction (R=.678), explaining 45.9% (R2=.459) of the variability in SMEs' financial performance. Specifically, equity capital (t=-1.975, P=.045, P<.05), debt capital (t=7.015, P=.000, P<.05), and retained earnings (t=6.289, P=.000, P<.05) emerged as statistically significant factors. Conclusively, the study highlighted that equity capital, debt capital, and retained earnings significantly influence SMEs' financial performance. To enhance their financial standing, the recommendation is for SMEs to adopt innovative strategies. These findings hold relevance for policymakers, SME stakeholders, academic circles, and SME owners, offering valuable insights into bolstering this critical sector. Keywords: Small and medium Enterprises, Economic development, financial performance, Equity capital, Retained earnings.

The Effects of Profitability and Debt-To-Equity Ratio on Operating Leverage

The aim of this study was to analyze the effects of profitability and debt-to-equity ratio on operating leverage in the case of companies listed on the Korea Exchange from 2000 to 2021. The analysis showed that the profitability and debt-to-equity ratio of companies in Korea rose with increasing operating leverage (fixed costs), and it is worth noting that a company’s cost structure affects its capital structure. There was a positive correlation between profitability and debt-to-equity ratio for Korean firms, which means that their capital structure can be explained by the pecking order theory. That is, the more profitable a company is, the more it prefers to raise funds through debt issuance rather than equity issuance. In the case of Korean companies with a relatively high dependence on debt, the increase in operating leverage for facility investment among other business activities mostly expands debt, and the higher the profitability, the higher the debt-to-equity ratio is.

How do intangible assets and financial constraints affect stock returns in Vietnam before and during the COVID‐19 pandemic?

AbstractWe are the first to determine the effect of intangible intensity (INTANG) on cross‐sectional stock returns after controlling financial constraints in the Vietnam stock market. Our sample includes 37,938 firm‐month observations from 488 non‐financial firms from October 2008 to February 2021. We employ Fama and MacBeth regressions and portfolio analysis methodologies to estimate the impact of intangible assets and financial constraints on stock returns. Our findings show that a percentage increase in INTANG empowers stock returns by 0.922%. Meanwhile, the cross‐sectional stock returns decrease by 0.506% when the financial constraints index increases by a percentage point. Moreover, the results suggest that intangible assets in the entire sample and before COVID‐19 empower the stock return cross‐sectionally. Our findings are robust after employing alternative INTANG proxies. Our findings support the risk‐based explanation, the pecking order theory, and prior literature. Our findings suggest governments should promote intellectual property and copyright regulations to encourage Small and Medium Enterprises (SMEs) to expand intangible assets. Furthermore, investors can utilize our suggested models to construct their portfolios efficiently.

Determinants of Credit Default in Banking in Nigeria

Purpose: The aim of the study was to examine the determinants of credit default in banking in Nigeria.
 Methodology: The study adopted a desktop methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library
 Findings: The determinants of credit default in Nigerian banking encompass a range of factors, including economic stability, regulatory oversight, risk management practices, loan portfolio quality, and macroeconomic conditions. Addressing these factors is crucial for banks to effectively manage credit risk and reduce the likelihood of credit defaults.
 Unique Contribution to Theory, Practice and Policy: Agency Theory, Pecking Order Theory and Information Asymmetry Theory may be used to anchor future studies on the examining determinants of credit default in banking in Nigeria. banks should initiate financial literacy programs for borrowers to improve their understanding of financial products and responsibilities. Regulators should encourage the adoption of advanced credit risk assessment models and provide guidelines on best practices in risk management.

Corporate Governance, Internal Control and Leverage: Are We There Yet?

Corporate governance serves as a robust internal control mechanism. Literature has established that strong corporate governance improves oversight, accountability, and transparency. In the governance and leverage literature, agency theory and pecking order theory suggest that strong governance mechanisms reduce leverage, as stronger governance provides good internal control to check managerial opportunistic behaviors, preventing overinvestment and other entrenchment practices through excessive borrowing. However, leverage may itself act as an external disciplinary mechanism, thereby substituting the need for strong internal governance. Almost two decades of studies exist investigating the relationship between corporate governance and leverage without a clear direction. Furthermore, we investigate the relationship between corporate governance and the speed of leverage adjustment, revealing a consensus among many studies that firms subject to strong governance adjust their leverage more expeditiously than those under weak governance. Our current study synthesizes prior research and points toward the direction of improvement.

Influence of Entrepreneur’s Action Logics on His Intention to Adopt Crowdfunding: A Pecking Order Theory Perspective

Crowdfunding (CF), a new funding channel, is prompting more research on the non-financial determinants of its adoption. This paper is part of this emerging current and aims to explain using the logic of entrepreneurial action, the entrepreneur intention to adopt CF. The binomial logistic regression test on a simplified intention model based on the Unified Theory of Acceptance and Use of Technology model (UTAUT) reveals that the intention to adopt CF varies according to the entrepreneur’s commitment to entrepreneurial act logic and his management logic. These results reveal the validity of the pecking order theory and highlight the importance of incitation to risk-taking and entrepreneurial transparency, catalyst factors for participation in CF.

Board Diversity and Efficiency of Universities Registered in Kenya: The Role of Funding Sources

The board diversity of institutions plays an integral role in minimizing uncertainty, augmenting knowledge sharing, improving resource utilization, and crafting overall institutional strategy to enhance optimal efficiency. Institutions with more heterogeneous boards are characterized by their ability to attract finances from multiple sources; hence, they are better positioned to be more efficient in their operations. The main aim of this study was to assess the role of funding sources in the association between board diversity and the efficiency of universities registered in Kenya. The study was supported by the agency theory, the human capital theory, the stewardship theory, and the theory of pecking order. The positivist research paradigm anchored the study. A census study of 75 public and private universities in Kenya was conducted using a descriptive longitudinal research approach. The descriptive statistics included calculating the counts, standard deviation, mean, minimum and maximum values, coefficient of variation, kurtosis, and skewness. The fixed effect model was used as the primary estimation technique in inferential statistics. The results established that funding sources partially mediate the association between board diversity and efficiency. The study recommends that for universities to increase efficiency, the boards must make a greater effort to support board diversity, establish the dimensions within the board diversity relevant to efficiency enhancement, and establish multiple funding sources to remain afloat in their operations.

Minority entrepreneurs and start‐up financing

AbstractThere is a need for additional research on minority entrepreneurs need to access start‐up funding to grow and sustain their businesses. The problem is access to financial capital is a constraint for minority entrepreneurs and negatively impacts their ability to stay in business. Minority borrowers face more difficult borrowing conditions than Caucasian entrepreneurs. The results from this case study demonstrated the pecking order theory and the resource base theory, and that there is no relationship between the source of the funding and the success and failure of 11 minority‐owned small business startups. Case study is an excellent research design for this study because it allows a researcher to investigate the lived experiences of individuals who have shared experiences of a particular event or condition. The results from this case study showed a majority of the research participants indicated that avoidance of debt is a primary motivating factor to use personal savings as a primary choice in funding their respective businesses. This article is designed to assist policymakers at both the state and federal government levels in better understanding how to provide accessible financing to these entrepreneurs. Also, this article is designed for all individuals who have started a business or may be thinking about starting a business to get a better understanding of the obstacles and motivations minority entrepreneurs encounter when attempting to find financing to start their businesses.

Institutional Ownership, Capital Structure and Performance of SMEs in China

This article examines the relationship between ownership, leverage, and performance for Chinese small and medium enterprises (SMEs). Our study sheds light on how institutional ownership affects the performance of Chinese SMEs. We use agency and the pecking order perspective as background theories for analysing the relationships between institutional ownership, capital structure, and firm performance. We use a range of regression estimations for robustness checks and include Quantile regression, static and dynamic panel regression models, and a two-step system Generalized Method of Moments (GMM) approach to explore data covering 2009–2015. Our findings show that institutional investor’s ownership affects the performance of Chinese SMEs positively and significantly. The negative relationship between leverage and performance indicates the dominance of family ownership in Chinese SMEs, where firms rely more on retained earnings for financing, which aligns with the pecking order theory (POT) perspective. The results also suggest that institutional ownership could mitigate agency issues in Chinese SMEs. JEL Classification: G30, G38, G39

Determinants of Access to Bank Financing in SMEs in Mexico

Several empirical studies indicate that the lack of financing is one of the main barriers that affects the economic growth of small and medium enterprises (SMEs). The main objective of this investigation was to determine to what extent the economic sector, the enterprise size, the characteristics inherent to the enterprise, the legal status, the variables linked to the performance of the enterprise, and the attributes of the owner influence the access to the bank financing of SMEs in Mexico. Using a discrete-response probit regression model, the impact of enterprise characteristics on the probability of obtaining a bank loan was determined. The data collected are from the Enterprise Surveys of Mexico, carried out by the World Bank. The sample of 1480 enterprises is representative by enterprise size, by economic sector, and by region. The research has a quantitative approach with a correlational scope, and a nonexperimental and transectional design. One of the main results highlights that the determinants with the greatest influence on access to bank financing are: the age, the small size, foreign participation, and the manufacturing sector. These results are consistent with other empirical studies, as well as with the pecking-order theory and the financial life-cycle theory.

Effect of Risk on Total Debt of Companies Listed on the Nairobi Securities Exchange, Kenya

Despite the availability issue, debt financing continues to be an essential form of funding for businesses. Risks have been a major source of uneasiness for owners, executives, experts, as well as shareholders globally. The Kenyan enterprises have a greater susceptible to variations in currency rates in the nation’s economic climate, which is growing to become increasingly open with an increase in global trade. The study objective is to investigate the effect of risk on total debt of companies listed on Nairobi Securities Exchange. The study was underpinned by tradeoff theory and pecking order theory. The study utilized causal research design. Secondary data was used to collect data from yearly accounting statement from 2007-2011. Panel regression was used to analyze the fixed effect model. The result showed that risk negatively and substantially affects total debt. The study recommended that the management of listed firms should understand the tradeoff theory and pecking order theory. The study also recommended that risk should continually be monitored by companies to be in line with the prevailing economic conditions. This can be ensured by studying other factors trend that can affect the risk of companies.

Information asymmetries and debt financing: New evidence from the 2007-2008 financial crisis

Purpose: Focusing on the 2007-2009 financial crisis, this study investigates how firms' and debtholders' information sensitivity jointly shape corporate debt financing. According to the pecking order theory, opaque firms prefer bank loans over more information-sensitive sources like bonds and equity. When external conditions worsen, firms face difficulties accessing bank loans and look for alter-natives. Yet, as bondholders are more information-sensitive than banks, the substi-tution effect may not occur especially for firms with lower financial reporting qual-ity (FRQ). Design/methodology/approach: A matching difference-in-differences ap-proach is used to compare the debt financing of firms with and without access to corporate bond markets before and after the onset of the financial crisis. A sample of quarterly data of US-listed firms is analyzed for the 2006Q3-2009Q2 period. Findings: The reduction in debt financing due to the crisis was greater for firms with access to bond markets. The effect is more pronounced for firms with lower FRQ. These firms also looked more for alternatives such as equity and cash re-sources.

Capital structure of single family office-owned firms

Single family offices (SFOs) manage trillions of dollars worldwide. The enormous value of assets under management highlights their key role as a cohesive wealth management tool globally. Despite the increasing relevance of SFOs, research on SFOs is still in its early stages. Particularly little is known about the capital structure of the firms owned by SFOs. By drawing on a hand-collected sample of 173 SFO-owned firms in the DACH (Germany, Austria, Switzerland) region, we compare the capital structure of SFO-owned firms with the capital structure of family-owned firms. Our empirical results show that SFO-owned firms display a higher long-term debt ratio than family-owned firms, indicating that SFO-owned firms follow trade-off theory, similar to private equity-owned firms. Additionally, we show that this effect is stronger for SFOs that sold their original family firm. In contrast, family-owned firms tend to be more conservative in their financial decision-making and seem to follow the logic of the pecking order theory.

Compound Financial Instruments and Earnings Management: A Pecking Order Theory Perspective

Compound Financial Instruments and Earnings Management: A Pecking Order Theory Perspective

Analysis of the capital structure of startups in light of the tradeoff and pecking Order theories

Purpose: Startups have significant differences compared to other companies. They have many intangible assets (e.g., team tenure and experience of founders), are risky, and tend not to generate profits in their initial years (Heirman & Clarysse, 2007; Weber & Zulehner, 2009). Does the startups’ financing choice also differ from that of traditional companies? We analyzed the capital structure of startups in their first years of life based on the classic tradeoff and pecking order theories. Methodology/approach: We collected data on 40 startups in the city of Ribeirão Preto, São Paulo, Brazil, through a questionnaire on the profiles of the founders, company characteristics, bottom-line performance and financing sources. The data collected covered the year of founding and the three subsequent years. Findings: The results indicated that these startups mainly financed themselves through the founders’ capital in all four years covered. Only in the third year did they start using resources generated internally, indicating pecking order adherence. However, the presence of angel investors and government subsidies contrasted with the absence of bank debt. In line with the tradeoff theory, bank debt was not a viable financing option in the early years of these firms since they had low profitability and high risk. Theoretical/methodological contributions: We offer a theoretical contribution by analyzing the adequacy of traditional financial theories in the specific context of startups. Originality: The finance literature about startups is scarce, and few studies have analyzed these companies from the capital structure theoretical perspective. Social contributions / for management: We provide a panorama of the financing of startups to support their financial planning regarding fundraising.

Firm Characteristics and Financial Distress among Manufacturing Firms Listed at Nairobi Securities Exchange Kenya

Businesses including companies listed on stock markets strive to predict financial distress to ensure they manage the factors that could potentially lead to such distress. It is however not clear how the various factors affect financial distress particularly firm size; firm activity levels; firm financial leverage; and profitability given that these are some of the biggest determinants of the financial condition of a business. The lack of clarity results from the fact that there are numerous models of financial distress with each providing varying factors some often contradicting each other. It is therefore critical to evaluate how these affects financial distress among manufacturing firms listed at Nairobi Security Exchange (NSE). This study aims to evaluate how firm size, turnover, leverage and profitability influence financial distress as measured by the B-Ratio. This census survey with a population of 13 companies covers the period 2013 to 2022. Three companies however did not meet the data criteria and were therefore excluded from the analysis. This left 100 firm-year observations. The study utilized four theories of financial distress that include neoclassical theory of investment; liquidity preference theory; pecking order theory; and Wreckers theory of financial distress. The study used panel regression analysis to test the hypotheses that firm size, turnover, leverage and profitability have no significant influence on financial distress. Hausman model specification test revealed that the fixed effects panel regression model was the most appropriate for analysis and it was subsequently used in arriving at the inferential findings. T-test and p-value at 95% confidence interval were used in hypotheses testing. All the four hypotheses set for the study were rejected and it was concluded that size, activity, leverage and financial performance are significant determinants of financial distress. The findings reveal that whereas firm size (as shown by firm capitalization ratio), firm activity level (as shown by total asset turnover) and firm profitability (as shown by return on equity) all had a negative effect on B-ratio, financial leverage had a direct positive effect on financial distress. The study was limited to the 10 qualifying companies at the NSE and has suggested that similar studies could be expanded to non-listed companies, listed nonmanufacturing companies as well as with the use of different models such as hazard models.

Innovation, asymmetric information and the capital structure of new firms

ABSTRACT Start-ups are essential contributors to economic development, but they often face several barriers to growth, including access to finance. We study their capital structure in their early years of operation through the lens of Pecking Order Theory, exploring how the pursuit of innovation influences firms’ reliance on different types of finance. Panel analyses of 8273 German start-ups show that innovation activities are relevant predict start-ups’ revealed preferences for finance. Effects on the type and order of financing sources depend on the degree of information asymmetries specific to research and development activities, human capital endowments, and the market introduction of new products and processes. New firms focused on research and development activities and with better human capital are less likely to receive informationally complex finance such as debt and will rely relatively more on owner and equity finance. Mixed evidence is found, instead, on the role of new products or processes. Our results suggest that the traditional pecking order theory does not hold for new firms, implying that owner and external equity play a much more prominent role for such firms. Then, managers and entrepreneurs should consider specific sources of finance and financial instruments in light of their innovative activities.

Three-way interaction moderation model of legal origin in strengthening the role of firm characteristics in choice of sukuk type

Purpose This study aims to learn how a three-way interaction moderation model is used to analyse the role of country-specific characteristics, in the form of the implementation of Sharia law and legal origin in a particular country, in the choice of sukuk type. Design/methodology/approach The firm profitability and firm leverages of sukuk issuer are used as the firm characteristics that can influence the choice of sukuk type between Mudharaba sukuk, Ijara sukuk and Murabaha sukuk. The research sample of 545 global sukuk issuances, obtained from the IIFS database, includes the issuance of Mudharaba sukuk, Ijara sukuk and Murabaha sukuk from ten sukuk issuer countries all over the world. Findings The research results show that the probability of choosing Mudharaba and Ijara sukuk is found in issuers sukuk with a high firm leverage, while the probability of choosing Murabaha sukuk is found in issuers sukuk with a high firm profitability. A three-way interaction moderation model is used in this research to explain that sukuk issuers in countries that implement Sharia law and adopt a legal origin common law system will have a higher choice of Mudharabah and Ijarah sukuk types if the firm’s leverage is high. If the firms’ profitability is high, then the sukuk issuer prefers Murabaha sukuk. Research limitations/implications The use of firm’s characteristic variables is based solely on trade-off theory and pecking order theory. Also, limitations on the implementation of Sharia law in countries that do not provide opportunities for countries that apply a mixed law system. Practical implications The role of Sharia law and common law legal origin is proven, through a three-way interaction model, to strengthen the interaction of the firm leverage and choice of Mudharaba sukuk. Social implications Legal certainty for Islamic financial institutions is created in the context of ease of investing in sukuk. Flexibility in the structure is also one of the factors that encourage the development of market acceptance of sukuk. The right structure of the sukuk can be used for specific target markets. Originality/value There has been no study carried out on a three-way interaction moderation model used to analyse the role of country-specific characteristics. The role of Sharia law and common law legal origin is proven, through a three-way interaction model, to strengthen the interaction of the firm leverage and choice of Mudharaba sukuk.