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The Pecking Order Theory: Evidence from Listed Firms in Nigeria

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  • Felix Babatunde Dada
  • Ben Ukaegbu

Abstract

Pecking order theory of capital structure demonstrates how managers could reduce inefficiency in the presence of information asymmetry in the source of finance. This study aims at a critical evaluation of the relevance of pecking order theory to firms, using the panel data of the listed firms on the Nigerian Stock Exchange. The study adopt the fixed effect model for the determination of the target capital structure and the decision is based on the result of the Hausman test. The study applies the Vector error correction model to establish causality between the variables. The outcome indicates that the capital structure of Nigerian firms is positively related to asset structure while it is negatively related to profitability and liquidity. The study also shows that there is a causal relationship ranging from profitability and liquidity to the capital structure.

Suggested Citation

  • Felix Babatunde Dada & Ben Ukaegbu, 2015. "The Pecking Order Theory: Evidence from Listed Firms in Nigeria," International Finance and Banking, Macrothink Institute, vol. 2(2), pages 72-84, December.
  • Handle: RePEc:mth:ifb888:v:2:y:2015:i:2:p:72-84
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    References listed on IDEAS

    as
    1. Joshua Abor, 2005. "The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana," Journal of Risk Finance, Emerald Group Publishing, vol. 6(5), pages 438-445, November.
    2. Nikolaos Eriotis & Dimitrios Vasiliou & Zoe Ventoura-Neokosmidi, 2007. "How firm characteristics affect capital structure: an empirical study," Managerial Finance, Emerald Group Publishing, vol. 33(5), pages 321-331, April.
    3. A. Panno, 2003. "An empirical investigation on the determinants of capital structure: the UK and Italian experience," Applied Financial Economics, Taylor & Francis Journals, vol. 13(2), pages 97-112.
    4. 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.
    5. Basil Al-Najjar & Peter Taylor, 2008. "The relationship between capital structure and ownership structure: New evidence from Jordanian panel data," Managerial Finance, Emerald Group Publishing, vol. 34(12), pages 919-933, October.
    6. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    8. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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