Testing the pecking order theory: the importance of methodology

Dimitrios Vasiliou · Nikolaos Eriotis · Nikolaos Daskalakis

57 citations0/0 files storedQualitative Research in Financial Markets

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Purpose The purpose of this paper is to show that different methodologies may lead to different implications about the validity of the pecking order theory. Design/methodology/approach Using data from Greek firms as a starting‐point, the paper first investigates whether they follow the financing pattern implied by the pecking order theory and then illustrates that conclusions concerning the pecking order should be carefully shaped by researchers, as the methodology used can be misleading. Two different information sources are used; the first is data derived from the financial statements of the Greek firms listed in the Athens Exchange, while the second comprises the answers to a detailed questionnaire. Findings It is shown that a negative relationship between leverage and profitability does not necessarily mean that the pecking order financing hierarchy holds. Analysis should not rely solely on the mean‐oriented regression quantitative analysis to test the pecking order theory, as it refers to a distinct hierarchy. Research limitations/implications Further research should focus on investigating the reasons that underlie actual firm financing. Practical implications The fact that the pecking order is actually a hierarchy makes research in this field more complex. Analysts should consider this special feature of the pecking order approach when analyzing the existence of the pecking order financing pattern. The methodology followed is of crucial importance in the analysis of the existence of the pecking order financing pattern. Originality/value To the authors' knowledge, this is the first paper to test the pecking order pattern of financing using simultaneously quantitative and qualitative data, and to compare results and conclusions drawn from these two different types of methodology.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1984The Capital Structure Puzzle 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 1995What Do We Know about Capital Structure? Some Evidence from International Data 2001The theory and practice of corporate finance: evidence from the field 1984The Capital Structure Puzzle 2002Testing the pecking order theory of capital structure 1999Testing static tradeoff against pecking order models of capital structure1This paper has benefited from comments by seminar participants at Boston College, Boston Unsiversity, Dartmouth College, Massachusetts Institute of Technology, University of Massachusetts, Ohio State University, University of California at Los Angeles and the NBER, especially Eugene Fama and Robert Gertner. The usual disclaimers apply. Funding from MIT and the Tuck School at Dartmouth College is gratefuly acknowledged. We also thank two reviewers, Richard S. Ruback and Clifford W. Smith, Jr., for helpful comments.1

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2016A Study of Determinants of Capital Structure through Panel Data Analysis of Firms Listed in NSE CNX 500 2018Firm Level Determinants of Capital Structure: Evidence From Egypt 2021Impact of cash surplus on firm’s capital structure: validation of pecking order theory

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