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Corporate Financial Dynamics: A Pecking-Order Approach

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Author Info
Hovick Shanazarian
Abstract

This paper shows that combining an upper constraint on dividends, a lower constraint on dividends due to shareholder preferences, and an interest rate that increases with the debt ratio leads to a pecking-order financial structure: A typical firm will start to finance a new investment by issuing new shares in combination with debt, then grow by financing its investments with retained earnings and borrowing, and eventually stop growing and distribute all profits. Repurchases of shares will speed up this growth path. Economic depreciation may make the firm want to stop the decline in its capital stock earlier.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 61 (2006)
Issue (Month): 4 (February)
Pages: 516-534
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200602)61:4_516:cfdapa_2.0.tx_2-c

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Related research
Keywords: pecking order; financial structure; firm growth;

Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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This page was last updated on 2009-12-1.

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