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Trade-Off Versus Pecking Order Theory in Listed Companies Around The World

Author

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  • Sorana Vătavu

    (West University of Timişoara, România)

Abstract

This paper provides an insight into the literature on capital structure and its determinants. The capital structure refers to the specific combination of debt and equity and their use in financing the corporate operations. Considering there are various determinants of corporate financing patters, many theories have been developed over time. From Modigliani and Miller theory, which was the first to examine the impact of capital structure on firm value, the trade-off theory and the pecking order theory are probably the most influential theories of corporate finance. The paper reveals the main financial indicators that have a significant impact on the capital structure of companies operating in both developed and under-developed financial markets. According to the particular preference for a capital structure theory, researchers showed that asset tangibility, profitability and tax shield are significant in the trade-off theory while in the pecking-order theory, the most influential factors are long-term profitability and investment opportunities. Regardless the presumed theory, most studies found firm size as essential to financing decisions.

Suggested Citation

  • Sorana Vătavu, 2012. "Trade-Off Versus Pecking Order Theory in Listed Companies Around The World," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 12(2), pages 285-292.
  • Handle: RePEc:pet:annals:v:12:y:2012:i:2:p:285-292
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    References listed on IDEAS

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    1. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 1-24, March.
    2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    3. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    4. 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.
    5. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, February.
    6. Chen, Jean J., 2004. "Determinants of capital structure of Chinese-listed companies," Journal of Business Research, Elsevier, vol. 57(12), pages 1341-1351, December.
    7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    8. Pandey I M, 2001. "Capital Structure and the Firm Characteristics: Evidence from an Emerging Market," IIMA Working Papers WP2001-10-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
    9. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    10. Michael J. Barclay & Clifford W. Smith, 1996. "On Financial Architecture: Leverage, Maturity, And Priority," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(4), pages 4-17.
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    More about this item

    Keywords

    trade-off theory; pecking order theory; financing patterns;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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