Pecking Order Research Articles

Analysis of Four Capital Structure Theories and Financing Choice of Chinese-Listed Companies

Controlling the capital structure is crucial to the financial management of the business. Maximizing the company's worth requires finding the appropriate capital structure. In this study, the relationship between corporate capital structure and corporate value is further investigated using the weighted average cost of capital (WACC) and capital asset pricing model (CAPM) analyses of four capital structure theories, including M&Ms First and Second Theories, the Trade-off Theory and the Pecking Order Theory, which examine the reasons why listed businesses' financing sequence conflicts with western thinking and point out its uniqueness and policy recommendations based on the current situation of China's stock market.

Relationship between Corporate Governance Practices and Credit Risk in Banking

Purpose: The aim of the study was to investigate Relationship between Corporate Governance Practices and Credit Risk in Banking.
 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 findings indicated a significant correlation between effective corporate governance practices and lower levels of credit risk exposure within banks. Specifically, banks that exhibited robust governance mechanisms, including independent board oversight, transparent risk management frameworks, and strong internal controls, demonstrated reduced instances of credit defaults and non-performing loans. These findings collectively underscored the pivotal role of corporate governance in mitigating credit risk and enhancing the overall stability and resilience of banking institutions.
 Unique Contribution to Theory, Practice and Policy: Agency Theory, Stakeholder Theory and Pecking Order Theory may be used to anchor future studies on relationship between corporate governance practices and credit risk in banking. Banks should prioritize recruiting directors with diverse skill sets, including expertise in risk management, to serve on their boards. Regulators should impose stricter disclosure requirements for banks' credit risk exposure and management practices.

Determinants of the Growth of Venture Capital in Nairobi City County, Kenya

Venture capital investment is concept that has increasingly attracted an attentions and expansion in the recent past. Many developed countries have so far embraced this increasing the production firms increasing and improving their national income generation and thus spurring economic growth. On the other hand, this is not the case with developing countries. Thus, this study seeks to examine the determinants of venture capital investment among developing economies, in which the case study was Kenya. The study objectives were; to examine the effect of financial innovations on the growth of venture capital in Nairobi city County, Kenya; to assess the influence of corporate governance on the growth of venture capital in Nairobi City County, Kenya; to establish the effect of diversification on the growth of venture capital in Nairobi City County, Kenya. Four theories underpinned the study that is the pecking order theory, portfolio theory and stakeholder theory and resource-based theory. Also, this study employed a descriptive design. The target population for the current study was a total of 33 venture capital firms operating within Nairobi City County. The respondents were a total of 33 fund’s managers, and 76 employees from the firms making a total of 109 respondents. Questionnaires be used in primary data collection. The validity and reliability were ascertained through content validity where a research expert and supervisor were employed for validity while pilot test was conducted to ascertain reliability by calculating Cronbach alpha to measure the internal consistence. The threshold of the Cronbach's bar alpha is 0.7. Data collection was done where questionnaires were distributed to the respondents using the drop and pick method and the respondents were then be allowed a two-week period respond to the questionnaire. Collected data were then be analysed using descriptive statistics, that is, frequencies, percentages, standard deviation, and mean. A Statistical Package for Social Sciences (SPSS) was used for data analysis. Findings were presented using bar charts, graphs, and diagrams for the purpose of easy analysis and interpretation. The study further conducted six diagnostic tests to ascertain normal distribution of data and to check internal consistence. Lastly, the study was done under strict ethical considerations that is an introduction letter was sought from the university, and research permit sought form the national commission for science, technology and innovation and respondent. From the results, three variables financial innovations, corporate governance and diversification depicted a positive and significant influence on the growth of venture capital in Nairobi County, Kenya. This implies that holding the three factors (FI, CG, and D) constant, the growth of venture capital in Kenya improved by 0.542 units at 0.008 level of confidence.

Customer–supplier relationships and non-linear financial policy response

We investigate whether changes in the capital structure of major customers play an important role in determining the firm’s financial policy. Following (Leary and Roberts, 2014) and using average customer idiosyncratic equity return shocks, we find that a firm’s leverage ratio is negatively and nonlinearly affected by the leverage ratio of its major customers. This “customer effect” occurs only when the idiosyncratic equity shock to the customer firms is negative. Consistent with the prediction of the modified pecking order theory that firms are more concerned about excessively high leverage ratios than excessively low leverage ratios, supplier firms tend to significantly reduce their long-term debt in response to increases in the leverage ratios of their major customers but are insensitive to the inverse change. Finally, consistent with the stakeholder theory and the dynamic trade-off theory, we find that this capital structure correlation is more pronounced for firms producing specialized or unique products, firms with lower profitability, firms with weaker operational capabilities, firms that take more risks, firms whose customers operate in more competitive industries, and firms whose customers are more financially vulnerable. Our results contribute to identifying the dynamics and determinants of corporate capital structures.

Profitability and Leverage: Different Effects of Negative Profits?

Objective – This study aims to examine the effect of profitability on leverage in firms with negative profits and the sensitivity of the COVID-19 pandemic in explaining the effect of profitability on leverage.Design/Methodology –This study uses unbalanced panel data for 660 firm-year observations over 4 (four) years from 2018 to 2021 on non-financial service firms. Two-stage least square regression was utilized to examine the effect of profitability on leverage.Results –Consistent with several previous studies, this study indicates that profitability negatively affects leverage and has similar results in firms with negative profits. Another finding is that the COVID-19 pandemic is not sensitive to explaining the effect of profitability on leverage. Both the pre-COVID-19 pandemic and during the COVID-19 pandemic, profitability has a similar effect on leverage.Research limitations/implications –This study is conducted over a short period, only four years. The study provides a new perspective on the effect of profitability on leverage in companies with negative profits and the pecking order theory in explaining the relationship between profitability and leverage in the Indonesian context.Novelty/Originality –This study examines the effect of profitability on leverage in firms with negative and positive profits using a two-stage least square (2SLS) in the Indonesian context.

Interbank asset-liability networks with fire sale management

Interconnectedness is an inherent feature of the modern financial system. While it contributes to efficiency of financial services, it also creates structural vulnerabilities: pernicious shock transmission and amplification impacting banks' capitalization. This has recently been seen during the Global Financial Crisis. Post-crisis reforms addressed many of the causes of this event, but contagion effects have not been fully eliminated. One reason for this may be related to financial institutions' incentives and strategic behaviours. We propose a model to study contagion in a banking system that captures network effects of direct exposures and indirect effects of market behaviour that may impact asset valuations. By doing so, we can embed a well-established fire sale channel into our model. Unlike in related literature, we relax the assumption that there is an exogenous pecking order of how banks would sell their assets. Instead, banks act rationally in our model; they optimally construct a portfolio subject to budget constraints to raise cash to satisfy creditors (interbank and external). We assume that the guiding principle for banks is to maximize risk-adjusted returns generated by their balance sheets. We parameterize the theoretical model with granular and confidential supervisory data for a representative sample of European banks; this allows us to run simulations of bank valuations and asset prices under a set of stress scenarios.

The choice of external financing source: The role of company size and stock liquidity

This paper aims to answer whether firms of different sizes and stock liquidities differ in the choice of external sources of financing in companies listed in CEE countries. To this end the net debt issuance is regressed on the financial deficit. In regressions Pecking Order Coefficients are allowed to vary across firms with different sizes and stock liquidities. The results indicate that companies with less liquid shares prefer issuing debt to cover financial deficits more than companies with more liquid shares. This implies that stock liquidity may substitute debt issuance in alleviating the adverse effects of information asymmetry, especially in relatively small companies. This is the first study in which the relationship between liquidity and debt-equity choice is considered solely from a pecking order theory point of view. Also this is the first study in which stock liquidity effects on capital structure are studied in the CEE countries. Research results may point to the advantages of increasing the liquidity of shares which may contribute to reducing information asymmetry and thus a better allocation of resources.

Signalling or Pecking Order Theory: An Evidence From Mining and Energy Sector

Purpose: The purpose of the research is to determine the impact of asymmetric information on capital structure decisions.
 
 Theoretical framework: The perspective of the Pecking Order Theory (POT) suggests that managers are more informed about new investments than shareholders, making external financing issuance more prone to asymmetric information.
 
 Design/Methodology/Approach: The data was collected from companies in the mining or energy sectors listed on the Indonesia Stock Exchange during the period of 2007 to 2022, resulting in 647 observation units. Growth opportunities were proxied by total sales (Lang et al., 1996), and the debt ratio was used to measure capital structure decisions (Myers & Majluf, 1984). OLS regression was employed to determine the impact of growth opportunities on capital structure decisions.
 
 Findings: Annual sales are sufficiently increased, companies send positive signals, leading to the issuance of more debt than equity (Akerlof, 1970; S. Ross, 1977; S. A. Ross, 2005).. Companies follow the financing hierarchy when annual sales are lower than the signaling mechanism.
 
 Research, practical & social implications: Facts and empirical evidence have challenged the signaling and pecking order theories, leading to significant debates. The obligation of financial disclosure has resulted in a reduction of asymmetric information, consequently leading to an increase (decrease) in annual sales, which in turn causes a decrease (increase) in the debt ratio.
 
 Originality/Value: The value of the study was extended in Indonesia with abundant of natural resource (energy and mining).

Capital Structure and Financial Performance of Micro-Finance Institutions in Kenya

Purpose: This research was envisioned to assess the influence of the capital structure on ROE of Micro-financial institutions in Kenya. The research was in search for resolving the following problem; is there a connection between the composition of capital (loan, shareholder’s equity, retained earnings and deposits) and the viability of MFIs? If the firm size has an influence on ROE? The study was motivated by the following capital structure theories, which are the theory of pecking order, Trade-off theory and the theory of Marketing timing.
 Methodology: To define the independent variable, the researcher used a correlation research design. The target demographic of the research was all 14 successful microfinance companies as recognized by the Kenya Microfinance Act as of 2020. The research therefore represented a census survey with a period of 5 years (from 2016-2020). The study's research model consisted of the independent variable loans, shareholder’s equity, retained earnings and deposits and the size of the firm as a moderating variable, determined by the firm’s total asset value, and the following ratios as dependent variables: return on equity. To analyze the results, EViews was used. There was descriptive and inferential statistics execution. Diagnostic results were computed before the data analysis.
 Findings: The results were presented in the form of tables. The inferential statistics with the moderating variable revealed that loan financing has statistical negligible sway on the financial return of MFIs (p=0.9832>0.05). Shareholders equity financing was found to have a statistically significant influence on financial performance of MFIs (p=0.0047<0.05). Retained earnings financing was found to have a statistically significant influence on financial performance of MFIs (p=0.0016<0.05). Deposit financing was found to have a statistically insignificant influence on financial performance of MFIs (p=0.2168>0.05).in this study.
 Unique contribution to theory, practice and policy: The study suggested that MFIs should strike a balance benefits and costs of debt arising thereof in line with the Trade-off theory, fast growing MFIs to utilize more retained earnings in capital structure, more profitable businesses use less shareholder’s equity in capital structure mix and finally positive correlation on deposits indicating similar correlation is likely to exist with financing capital structure. Thus MFIs may consider reviewing these measures so as to enhance performance to serve the low-income earners better in improving the economy. Further studies can be done based on other performance measures like ROA, EPS,Net Interest Margin. The study used a correlation research design for five-year period from 2016 to 2020. Therefore, this study can be replicated using a different methodology and covering a longer period like ten year.

Effect of Equity on Financial Performance of Listed Insurance Corporations In Kenya

Efforts to revive ailing corporations across the world have mostly been centered on financial restructuring and re-engineering. Slow growth in the financial performance of insurance companies in Kenya coupled with low market penetration rate motivated the researcher’s interest to investigate the effect of Equity on financial performance of these organizations. Three theories namely the Modigliani and Miller Theory, the Pecking Order Theory, and the Trade Off Theory guided the study. The concepts of capital structure and financial performance as well as empirical literature are discussed in chapter two. A descriptive research design was adopted to describe the relationship between the variables of the study. Whereas equity capital forms the independent variable, financial performance as measured by ROA formed the dependent variable. The target population was a census of all insurance firms listed at the Nairobi Securities Exchange (NSE). The study used secondary data extracted from the annual financial reports of respective firms from 2016 to 2020. Data coding and analysis was done using version 28 of the SPSS and STATA version 18 software while financial ratios were calculated using Microsoft Excel spreadsheet. The data was then summarized using descriptive statistics which included the standard deviation and weighted means. There were significant positive correlations between ROA and Equity Ratio, suggesting that higher equity was associated with better financial performance (ROA). Overall, the findings indicated that Equity had a positive correlation with financial performance according to regression and panel data analysis. The study recommends that insurance corporations should prioritize equity over debt in their capital structure decisions so as to increase their financial performance

Corporate environmental responsibility and financing patterns: Does firm size matter?

ABSTRACT This article provides a comprehensive assessment of the impact of corporate environmental responsibility (CER) on financing patterns of working capital and fixed investment. Financing sources include internal funds, equity, different types of debt financing, and government grants. Specifically, this study examines differences in the impacts of CER on financing patterns for smaller and larger firms. Based on a sample of 15,082 firms covering 27 countries, our empirical findings indicate that environmentally responsible activities do not significantly affect financing patterns of working capital but affect the use of internal finance and almost all external sources for capital expenditures. Moreover, the impacts of environmentally responsible activities on capital expenditures vary across financial sources and depend on firm size. The revealed pecking order among financing sources and changes in the debt ratio offer valuable insights into the validity of capital structural theories for smaller and larger eco-friendly firms.

Capital Structure and Firm Value. The Role of Contextual Variables in this Relationship

This study aims to identify the role of contextual variables, especially the interest rate, in affecting the relationship between a firm’s capital structure and firm value. This study investigates the capital structure of Pakistani-listed firms in light of rising interest rates, declining “Domestic credit to the private sector” and emerging Islamic banking in the country. The study uses GMM (Two-Step) to examine the linear, and dynamic Panel threshold model to examine the quadratic relationship between leverage firm value and how other contextual variables affect this relationship. The study found that there is a negative relationship between leverage and firm value in the presence of the majority of contextual variables. Except for tax, depreciation, and free cash flow, leverage shows a negative relationship with firm value in presence of all other contextual variables. Further results show that there is a quadratic relationship present between leverage and firm value. Also, the interest rate and inflation has a negative effect on firm value in long term, while in short term this relationship is positive. The study supports the pecking order & Trade-off theory but does not support the agency theory. The study is using new methodologies, just as the panel threshold model which is never used before for Pakistani industries. The panel threshold model is using some variables for the first time in research. Previously only size and debt were used in panel threshold models, this time we used debt, firm value, profitability, tax, and tangibility, which will be a significant contribution to the literature.

Navigating through turbulence: Jet Airways’ acquisition failure and recapitalisation strategy

Learning outcomes The case aims to understand and analyse the capital structure decisions made by a profit-making, growing organisation which aimed to be India’s premier airline and the market leader. The company that had pursued a high debt policy, to take advantage of the financial leverage that it would get, was now facing problems in an operating environment that proved to be challenging. A decline in operating profit, coupled with high-interest costs and an uncertain environment with cutthroat competition, had caused the company to plunge into losses. Attempts to deleverage by equity infusion were proving to be difficult. The case can be used in MBA, Executive Education and doctoral programmes. The learning objectives of this case are: to analyse the capital structure of the company, to interpret the relationship between financial leverage and risk, to assess the pecking order theory, to analyse the nuances of the aviation sector and the factors influencing the profitability of the companies in the aviation industry, to estimate the risks and the rewards associated with foreign currency loans, to evaluate the magnifying impact of the financial leverage and to propose deleveraging methods like sale and leaseback, debt conversion to equity and devise a revival strategy for the company. Case overview/synopsis The case discusses the dilemma faced by Naresh Goyal, promoter and chairman of Jet Airways (India) Limited. At the initial stage, Jet Airways, like many other companies in its growth phase, relied on borrowed funds to meet its investment needs. However, over-reliance on borrowed funds with just one equity infusion resulted in a high leverage ratio and an aggressive capital structure. Moreover, the company operated in a sector that was highly regulated, with competition that was cutthroat and a cost structure that was volatile. A high operating risk, coupled with high financial leverage, pushed the company into incurring losses. Having run out of cash, Jet Airways eventually defaulted on loan repayments to its lenders. Facing the eventuality of losing control of the company to lenders or to a strategic investor, Goyal was trying to figure out a way to save the company from insolvency and liquidation. It was becoming increasingly difficult for Goyal to keep Jet Airways, the company he had nurtured like a baby, airborne. Complexity academic level The case can be taught in both online and offline modes of delivery in a 90-minute session. Post-covid, the delivery mode of classes has changed. In online sessions, it may be a challenging task to ensure student participation. Supplementary material Teaching notes are available for educators only. Subject code CSS 1: Accounting and Finance.

Trade Off and Pecking Order Capital Structure Theories in Tourism Sector in the Portuguese Central Region

The present study aims to identify the predominant theory in financing decisions, and which are the determinants of the capital structure of small and medium enterprises (SMEs) of the tourism sector in the Central Region of Portugal. The statistical method applied was the econometric model of linear regression, using a sample of 606 SMEs in the tourism sector in the Central Region, for a period of analysis between 2011 and 2018. The focus on the tourism sector is due to its importance in the Portuguese economy and to the existence of few studies, particularly in the Central Region. In the analysis of the determinants of capital structure decisions we used as explanatory variables profitability, asset tangibility, size, total liquidity, other non-debt tax shields, risk and age of SMEs. The results obtained suggest that the capital structure decisions follow more closely the assumptions of the Pecking Order theory but may also follow the assumptions of the Trade-Off theory. Therefore, this paper enhances that Trade-Off and Pecking Order Theories are not mutually exclusive in explaining the capital structure decisions of SMEs. We may conclude that SMEs firstly finance themselves with retained earnings, then use external financing and finally resort to capital increases. Keywords: determinants of capital structure, SMEs, tourism sector, pecking order theory, trade-off theory

Correlation Between Financial Performance Indicators and Capital Structure of Coal Mining Industry Listed on the Indonesia Stock Exchange

This research examines the correlation between capital structure (as proxied by Debt-to-Equity Ratio) and several financial performance indicators, including profitability, asset structure, liquidity, and firm size. This research focuses on 18 coal mining companies listed on the Indonesia Stock Exchange (IDX) by at least 2020. The data is derived from the financial reports published on the IDX between 2020 and 2022. Multiple Linear Regression technique is being employed to determine the correlations. Before employing the Multiple Linear Regression technique, several tests were conducted to examine the data's validity and reliability, including normality, multicollinearity, autocorrelation, and heteroscedasticity tests. Multiple Linear Regression is employed after the data passes the tests, consisting of partial regression, ANOVA, and goodness-of-fit tests. This research found that profitability and liquidity negatively correlate with capital structure. At the same time, asset structure and firm size positively correlate with capital structure. Overall, the result of this research supports Pecking Order Theory, in which firms are preferred to use internal financing first. When firms generate higher profits and cash flow, they may consider re-balancing external financing. This research also concludes that profitability, asset structure, liquidity, and firm size represent 47.7% of the variables correlated with capital structure. Future research may be conducted to seek other variables that have not been included in this research yet but are correlated with capital structure.

Pecking order of convertible security financing for start-up ventures and overinvestment

This study develops a parsimonious theoretical model to investigate the pecking order in financing for start-up ventures, especially with convertible securities, under adverse selection where a firm’s investment possibly has a negative value. While the role of convertible securities is limited and the cross-subsidy enables inefficient business in the competitive market, the signaling in relationship financing prevents inefficient investment and convertible securities are useful in situations with more volatile cash flow distributions. Considering the interrelation between competitive markets and relationship financing without investors’ monopolistic positions, signaling with convertible securities from profitable firms is likely to occur when market conditions are uncertain or the economy is stagnant, thereby possibly explaining boom and bust.

Currency change and capital structure decisions: evidence from the birth of the Euro area

PurposeThe paper investigates if the process that led to the birth of the Euro Area had a significant impact in homogenizing the capital structure decisions of European firms since the first introduction of the common currency.Design/methodology/approachA large sample of firms was constructed, and a Tobit-censored regression model was utilized to investigate the determinants of firms' observed capital structures. The Black–Scholes–Merton model was used to infer market values of assets, as well as the volatility of those values, from the observed market values of equity and the corresponding volatility. The existing differences in national tax rules were considered for estimating firm-specific marginal tax rates.FindingsIt was found that, despite the currency union and the institutional harmonization process, certain factors still play a different role. In particular, the impact of profitability is consistent with the pecking order view in some countries, and with the trade-off theory in others. Assets risk, measured as the annualized volatility of the market enterprise value, is the best predictor of observed leverage ratios. The sector of activity is significant in determining leverage decisions even when assets' risk is taken into account. Despite the monetary union and the increased financial and institutional integration in the Euro Area, the country of origin still plays a significant role in capital structure decisions, suggesting that other country-level factors may affect firms' financing behaviour.Practical implicationsThe paper indicates that, despite the long harmonization process of institutions, regulations and public budget required to join the Euro, firms' financing decisions are still affected by country-specific factors once the common currency is introduced. Therefore, new entrant countries in the Euro area should not expect their companies to immediately conform with those located in other countries within the common currency area.Originality/valueThis article investigated the impact of the currency change from national currencies to the Euro on the determinants of capital structure choices. It was shown that, despite the long harmonization process that led to the birth of the Euro Area, national factors still affect firms' financing decisions. This provides guidance for policymakers in countries that are planning to join the Euro about the impact this will have on firms' financing decisions in the entrant country.

Interaction Between the Cage Floor and the Variation of Different Fur Colors the Behavior and Against Perfomans of Kampung Super Chickens (Gallus domesticus Sp)

The Super Kampung chicken has a non-uniform coat color, this is related to the genetics of its parents. Genetics has a relationship with aggressiveness and this must be supported by a supportive cage floor. This study aims to examine the effect of the interaction between variations in coat color and different types of cage floors. The experimental material used was 120 DOC which were maintained for 70 days. This study used a completely randomized design (CRD) with a 5x2 factorial pattern with 10 treatments, namely 5 coat colors (W) and 2 cage floors (L), the treatments were repeated 3 times so there were 40 experimental units. The results showed that there was an interaction between the color of the coat and the type of floor of the cage on the pecking order variable. Color variation had a very significant (P<0.01) effect on roaming behavior, but had no significant effect (P>0.05) on pecking order behavior, feed conversion and performance index. The cage floor treatment had no significant effect (P>0.05) on all variables. The conclusion of this research is genetic such as genes (SORCS2) will be related to the level of aggressiveness. So that there are interactions of these two factors to the intensity behavior of pecking and pecking orders.

Capital Structure and Profitability in Emerging Market New Ventures: Insights from Trinidad and Tobago

New ventures, which are essential in driving economic development, face a universal challenge of accessing finance and deciding on a suitable capital structure. In developing countries such as Trinidad and Tobago, studying the impact of capital structure on profitability levels of new ventures is especially critical, given that current literature has primarily focused on established firms. To fill this gap, this study examined the existing capital structure of 43 new ventures in Trinidad and Tobago, testing the effects of different financing sources on net profit margins. The findings revealed that owners’ savings and retained earnings had a positive impact on net profit margins, while short-term loans, long-term loans, and informal investor finance had no significant effect. Moreover, this study expanded upon existing theories, particularly the pecking order theory, by testing it in the context of new ventures, rather than mature firms. The implications of this study are significant to financial managers in charge of decision-making for new ventures. It suggests the importance of owners’ savings and retained earnings in financing new ventures. Moreover, the findings suggest that new ventures in Trinidad and Tobago may benefit from pursuing funding options that align with the pecking order theory. Overall, this research emphasizes the need to consider the unique financial challenges facing new ventures when making decisions regarding their capital structure.

Capital Expenditure, Kesempatan Bertumbuh, Volatilitas Arus Kas dan Cash Holding

Cash holding or the availability of cash is very important in a company so that the company must have a good cash management system, especially companies that are vulnerable to a liquidity crisis. This study aims to empirically examine the effect of capital expenditure, growth opportunities, and cash flow volatility on cash holdings. The research was conducted on property and real estate companies listed on the Indonesia Stock Exchange with a total sample of 30 companies. The analysis technique used is multiple linear regression analysis. The results showed that capital expenditure had a significant negative effect, growth opportunities did not have a significant effect, and cash flow volatility had a significant positive effect. The results of the study contribute to confirming the trade-off theory and the pecking order theory as well as providing an empirical picture of the effect of capital expenditure, growth opportunities, and cash flow volatility on the cash holdings of companies in the property and real estate sector.
 Keywords: Cash Holding, Capital Expenditure, Growth Opportunity, Cash Flow Volatility.