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Testing the pecking order theory: the importance of methodology

Author

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  • Dimitrios Vasiliou
  • Nikolaos Eriotis
  • Nikolaos Daskalakis

Abstract

Purpose - The purpose of this paper is to show that different methodologies may lead to different implications about the validity of the pecking order theory. Design/methodology/approach - Using data from Greek firms as a starting-point, the paper first investigates whether they follow the financing pattern implied by the pecking order theory and then illustrates that conclusions concerning the pecking order should be carefully shaped by researchers, as the methodology used can be misleading. Two different information sources are used; the first is data derived from the financial statements of the Greek firms listed in the Athens Exchange, while the second comprises the answers to a detailed questionnaire. Findings - It is shown that a negative relationship between leverage and profitability does not necessarily mean that the pecking order financing hierarchy holds. Analysis should not rely solely on the mean-oriented regression quantitative analysis to test the pecking order theory, as it refers to a distinct hierarchy. Research limitations/implications - Further research should focus on investigating the reasons that underlie actual firm financing. Practical implications - The fact that the pecking order is actually a hierarchy makes research in this field more complex. Analysts should consider this special feature of the pecking order approach when analyzing the existence of the pecking order financing pattern. The methodology followed is of crucial importance in the analysis of the existence of the pecking order financing pattern. Originality/value - To the authors' knowledge, this is the first paper to test the pecking order pattern of financing using simultaneously quantitative and qualitative data, and to compare results and conclusions drawn from these two different types of methodology.

Suggested Citation

  • Dimitrios Vasiliou & Nikolaos Eriotis & Nikolaos Daskalakis, 2009. "Testing the pecking order theory: the importance of methodology," Qualitative Research in Financial Markets, Emerald Group Publishing, vol. 1(2), pages 85-96, June.
  • Handle: RePEc:eme:qrfmpp:v:1:y:2009:i:2:p:85-96
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    References listed on IDEAS

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    Cited by:

    1. Imad Zeyad Ramadan, 2013. "Debt-Performance Relation. Evidence from Jordan," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(1), pages 323-331, January.
    2. Lam, Patrick T.I. & Law, Angel O.K., 2016. "Crowdfunding for renewable and sustainable energy projects: An exploratory case study approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 60(C), pages 11-20.
    3. Nadeem Ahmed Sheikh & Zongjun Wang, 2011. "Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan," Managerial Finance, Emerald Group Publishing, vol. 37(2), pages 117-133, January.
    4. Attaullah Shah & Jasir Ilyas, 2014. "Is Negative Profitability-Leverage Relation the only Support for the Pecking Order Theory in Case of Pakistani Firms?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(1), pages 33-55.

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