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Trade-off theory, pecking order theory and market timing theory: a comprehensive review of capital structure theories

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  • Agha Jahanzeb

    (Universiti Teknologi Malaysia)

Abstract

This study examines the role of different capital structure theories in decision making regarding the debt preferences. The study includes the seminal work of Modigliani and Miller (1958) which was a novel study of its kind in the field of capital structure. Purpose of this study is to look into the three theories; Trade-Off Theory, Pecking Order Theory and Market Timing Theory. Literature shows that the two theories i-e; Trade-Off and Pecking Order have always dominated the capital structure decisions but recent theoretical and empirical work shows that Market Timing Theory has also challenged the basic theories as managers are always keen to take advantage of “market timing”.

Suggested Citation

  • Agha Jahanzeb, 2013. "Trade-off theory, pecking order theory and market timing theory: a comprehensive review of capital structure theories," Economics Bulletin, AccessEcon, vol. 33(1), pages 1-6.
    • Handle: RePEc:ebl:ecbull:eb-13-00118
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    Cited by:

    1. Dharveshsingh Gourdeale & Virendra Polodoo, 2016. "A Dynamic Econometric Modelling of the Determinants of Capital Structure of Listed Companies- A Mauritian Perspective," Applied Economics and Finance, Redfame publishing, vol. 3(3), pages 117-126, August.
    2. Henry Mugisha & Job Omagwa & James Kilika, 2021. "Capital structure, market conditions and financial performance of small and medium enterprises in Buganda Region, Uganda," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(3), pages 276-288, April.
    3. Mustaruddin Mustaruddin & Aristya Dinata & Wendy Wendy & Anwar Azazi, 2017. "Asymmetric Information and Capital Structure: Empirical Evidence from Indonesia Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 8-15.
    4. Khalil Ullah Mohammad & Shin-Ichi Nishiyama, 2021. "Impact of Financial Sector Opacity on the Capital Structure Choice of Asian Banks," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(3), pages 219-235, March.
    5. Jaroslav Mazanec, 2023. "Capital Structure Theory in the Transport Sector: Evidence from Visegrad Group," Mathematics, MDPI, vol. 11(6), pages 1-17, March.
    6. Strike Mbulawa & Nathan F. Okurut & Mogale Ntsosa & Narain Sinha, 2020. "Optimal Capital Structure and Speed of Adjustment under Hyperinflation and Dollarization," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 12(2), pages 158-177, May.
    7. Warisha Waheed & Danish Ahmed Siddiqui, 2019. "The Profiling of Awareness of Access and Use of Finance: A Case Study of SMEs In Karachi," Asian Development Policy Review, Asian Economic and Social Society, vol. 7(3), pages 133-164, September.
    8. David Haritone Shikumo & Oluoch Oluoch & Joshua Matanda Wepukhulu, 2020. "Effect of Long-Term Debt on the Financial Growth of Non-Financial Firms Listed at the Nairobi Securities Exchange," Papers 2010.12596, arXiv.org, revised Nov 2021.
    9. Raja Zekri Ben Hamouda & Faouzi Jilani, 2023. "Impact of the Global Financial Crisis and the Tunisia’s Jasmine Revolution on the Corporate Capital Structure: Evidence from Four Arab Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 13(6), pages 124-134, November.
    10. Mustapher Faque, 2021. "Cash management strategies and firm financial performance: A comprehensive literature review," Bussecon Review of Social Sciences (2687-2285), Bussecon International Academy, vol. 3(4), pages 23-30, October.
    11. Jaroslav Mazanec, 2023. "Capital Structure and Corporate Performance: An Empirical Analysis from Central Europe," Mathematics, MDPI, vol. 11(9), pages 1-19, April.
    12. Lina Maria. Maya Toro & Manuela. Gallon Bedoya, 2018. "Impact of Private Equity in Colombian Companies: A Case Study," European Journal of Economics and Business Studies Articles, Revistia Research and Publishing, vol. 4, September.
    13. Hoang Huy Nguyen & Chi Minh Ho & Duc Hong Vo, 2019. "An Empirical Test of Capital Structure Theories for the Vietnamese Listed Firms," JRFM, MDPI, vol. 12(3), pages 1-11, September.
    14. Wan Shah Shahdila-Shahar & Noryati Ahmad & Mohamad Nizam Jaafar, 2020. "Impacts of CEO’s Overconfidence in Financing Decisions on Shariah-Compliant Firms Listed on the Bursa Malaysia تأثيرات ثقة المدير التنفيذي في قرارات التمويل على الشركات المتوافقة مع الشريعة الإسلامية ," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 33(1), pages 117-131, January.
    15. , Aisdl, 2019. "Developing a sustainable financing model for SMEs during the organizational life cycle in Uganda," OSF Preprints 2s8k9, Center for Open Science.
    16. Francisco Javier Vásquez Tejos & Hernán Marcelo Pape Larre, 2021. "Market Timing and Pecking Order Theory in Latin America," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 13(2), pages 345-370, August.
    17. David Haritone Shikumo & Oluoch Oluoch & Joshua Matanda Wepukhulu, 2023. "Financial Structure, Firm Size and Financial Growth of Non-Financial Firms Listed at the Nairobi Securities Exchange," Papers 2303.10910, arXiv.org.

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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