The Pecking Order Theory and the Firm's Life Cycle

Laarni Tobia Bulan · Zhipeng Yan

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

Abstract

We examine the central prediction of the pecking order theory of financing among firms in two distinct life cycle stages, namely growth and maturity. We find that within a life cycle stage, where levels of debt capacity and external financing needs are more homogeneous, and after sufficiently controlling for debt capacity constraints, firms with high adverse selection costs follow the pecking order more closely, consistent with the theory.

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1984Corporate financing and investment decisions when firms have information that investors do not have 2002Illiquidity and stock returns: cross-section and time-series effects 1984The Capital Structure Puzzle 2002Testing Trade-Off and Pecking Order Predictions About Dividends and Debt 2002Testing the pecking order theory of capital structure 1987The Relationship Between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries 2006Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory☆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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