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The capital structure decisions of firms: is there a pecking order?

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  • Andrew Benito

    ()
    (Banco de España)

Abstract

This paper considers the "trade-off" and "pecking order" theories, the two most influential approaches to understanding firms' capital structure decisions. The paper adopts two approaches to examining capital structures using firm-level panel data for firms in both Spain and the United Kingdom. First, debt ratios are examined and found to be decreasing in cash flow or profitability and increasing in the investment of the firm in both countries. Second, aspects of the two different financial systems are examined. In Spain, a bank-based financial system, there is some modest evidence that such effects are weaker for larger firms and for firms with equity held by financial institutions. In the United Kingdom, a market-based financial system, the propensity to issue additional debt is compared to that for issuing new equity and found to be more sensitive to financial characteristics of the firm. The results are consistent with the pecking order approach and generally inconsistent with the tradeoff approach suggesting behaviour consistent with the existence of a hierarchy of finance faced by firms in Spain and the United Kingdom.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0310e.pdf
File Function: First version, September 2003
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0310.

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Length: 41 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:bde:wpaper:0310

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Keywords: capital structure; pecking order;

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References

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  1. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
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  3. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
  4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  5. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring.
  6. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
  7. Andrew Benito & Garry Young, 2003. "Hard Times or Great Expectations? Dividend Omissions and Dividend Cuts by UK Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 531-555, December.
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Citations

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Cited by:
  1. Ogebe, Patrick & Ogebe, Joseph & Alewi, Kemi, 2013. "The Impact of Capital Structure on Firms’ Performance in Nigeria," MPRA Paper 46173, University Library of Munich, Germany.
  2. Ojah Patrick, Ogebe & Joseph Orinya, Ogebe & Kemi, Alewi, 2013. "The Impact of Capital Structure on Firms’ Performance in Nigeria," MPRA Paper 45986, University Library of Munich, Germany, revised 04 Apr 2013.
  3. Sai Ding & Alessandra Guariglia & John Knight, . "Investment and financing constraints in China: does working capital management make a difference?," Discussion Papers 11/06, University of Nottingham, GEP.
  4. David Greenaway & Alessandra Guariglia & Zhihong Yu, . "The More the Better? Foreign Ownership and Corporate Performance in China," Discussion Papers 09/05, University of Nottingham, GEP.
  5. José Manuel Marqués & Fernando Nieto & Ana del Río, 2005. "Una aproximación a los determinantes de la financiación de las sociedades no financieras en España," Banco de Espa�a Working Papers 0535, Banco de Espa�a.
  6. Viet Anh Dang, 2005. "Testing the Trade-off and Pecking Order Theory: Some UK Evidence," Money Macro and Finance (MMF) Research Group Conference 2005 28, Money Macro and Finance Research Group.

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