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The Pecking Order Theory: Evidence from Listed Firms in Nigeria

Listed author(s):
  • Felix Babatunde Dada
  • Ben Ukaegbu
Registered author(s):

    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.

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    File URL: http://www.macrothink.org/journal/index.php/ifb/article/view/8679/7173
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    File URL: http://www.macrothink.org/journal/index.php/ifb/article/view/8679
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    Article provided by Macrothink Institute in its journal International Finance and Banking.

    Volume (Year): 2 (2015)
    Issue (Month): 2 (December)
    Pages: 72-84

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    Handle: RePEc:mth:ifb888:v:2:y:2015:i:2:p:72-84
    Contact details of provider: Web page: http://ifb.macrothink.org

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    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, 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, 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, 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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