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Testing the pecking order theory: the importance of methodology

  • Dimitrios Vasiliou
  • Nikolaos Eriotis
  • Nikolaos Daskalakis

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.

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Article provided by Emerald Group Publishing in its journal Qualitative Research in Financial Markets.

Volume (Year): 1 (2009)
Issue (Month): 2 (June)
Pages: 85-96

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Handle: RePEc:eme:qrfmpp:v:1:y:2009:i:2:p:85-96
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  1. Chirinko, Robert S. & Singha, Anuja R., 2000. "Testing static tradeoff against pecking order models of capital structure: a critical comment," Journal of Financial Economics, Elsevier, vol. 58(3), pages 417-425, December.
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  3. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
  4. de Miguel, Alberto & Pindado, Julio, 2001. "Determinants of capital structure: new evidence from Spanish panel data," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 77-99, March.
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  7. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. 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.
  9. Brounen, Dirk & de Jong, Abe & Koedijk, Kees, 2006. "Capital structure policies in Europe: Survey evidence," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1409-1442, May.
  10. Lee, Inmoo & et al, 1996. "The Costs of Raising Capital," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(1), pages 59-74, Spring.
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  12. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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