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Trade-Off Theory Versus Pecking Order Theory: Ghanaian Evidence

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  • James Agyei
  • Shaorong Sun
  • Eugene Abrokwah

Abstract

The objective of this study was to examine the theoretical predictions of the pecking order theory and the trade-off theory to establish which of the two competing theories better explains the financing decisions of small and medium enterprises (SMEs). The study examined 187 SMEs in Ghana using the panel data methodology. The results reveal that the explanatory power of both theories apply and are pertinent to Ghanaian SMEs. The results also show that profitability, age, liquidity, growth, size, and tangibility of assets all have a significant impact on SMEs’ capital structure. In addition, the findings show that risk plays no vital role in how SMEs choose their capital structure. Broadly, the results provide evidence to back the pecking order theory, indicating that Ghanaian SMEs’ funding decisions exhibit the theoretical predictions of the pecking order theory.

Suggested Citation

  • James Agyei & Shaorong Sun & Eugene Abrokwah, 2020. "Trade-Off Theory Versus Pecking Order Theory: Ghanaian Evidence," SAGE Open, , vol. 10(3), pages 21582440209, July.
    • Handle: RePEc:sae:sagope:v:10:y:2020:i:3:p:2158244020940987
    DOI: 10.1177/2158244020940987
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