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Financing hierarchy: Evidence from quantile regression

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  • Chay, J.B.
  • Park, Soon Hong
  • Kim, Soojung
  • Suh, Jungwon

Abstract

This study uses the quantile regression method to determine the relative importance of internal and external sources of funds in financing corporate investments across different levels of investment activities. Our findings lend support to the first (internal–external) rung of the pecking order, as investments are more responsive to internal funds than to external funds at almost all investment levels except at top investment levels. However, empirical support for the second (debt–equity) rung of the pecking order is tenuous, as investments are more responsive to equity issuance than to debt issuance at low and medium investment levels. Intriguingly, firms rely primarily on internal funds for organic growth (via capital expenditures or R&D spending), whereas they use debt capital heavily in financing acquisition-led growth. Finally, firms at high investment levels hold large cash holdings and save a significantly large fraction of equity issue proceeds as cash.

Suggested Citation

  • Chay, J.B. & Park, Soon Hong & Kim, Soojung & Suh, Jungwon, 2015. "Financing hierarchy: Evidence from quantile regression," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 147-163.
    • Handle: RePEc:eee:corfin:v:33:y:2015:i:c:p:147-163
    DOI: 10.1016/j.jcorpfin.2015.06.004
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    More about this item

    Keywords

    Corporate investments; Quantile regression; Internal funds; External funds; Pecking order;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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