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The dynamic specification of the modified pecking order theory: Its relevance to Italy


  • Maria Elena Bontempi

    () (Department of Economics, University of Bologna, Strada Maggiore 45, Bologna Italy)


This paper proposes an empirical model for the modified pecking order theory (MPO) in which both trade-off (TO) and pecking order (PO) models are nested. The MPO model is specified as an error-correction mechanism and applied to a vast panel data-set. Unlike previously estimated financial models, it avoids a number of problems: the mis-specification of dynamics, the approximation of the target leverage using the historical mean, the constrained estimation of the free cash flow components in a unique parameter. The MPO model is particularly good at explaining "hybrid" systems (neither market-based nor bank-based) such as the Italian one, in which companies are a mixture of two types: TO-type firms with a long-term optimal debt ratio towards which they converge; PO-type firms for whom the short-term availability of internal funds for investment may interfere with the process of adjustment towards the target leverage. Finally, the MPO model enables us to separately test the individual relevance of each of the restricted ("pure") TO and PO models: results confirm their mis-specification and clearly point towards the excellent empirical performance of the MPO model.

Suggested Citation

  • Maria Elena Bontempi, 2002. "The dynamic specification of the modified pecking order theory: Its relevance to Italy," Empirical Economics, Springer, vol. 27(1), pages 1-22.
  • Handle: RePEc:spr:empeco:v:27:y:2002:i:1:p:1-22 Note: received: May 2000/Final version received: September 2000

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    References listed on IDEAS

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    Cited by:

    1. Seifert, Bruce & Gonenc, Halit, 2008. "The international evidence on the pecking order hypothesis," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 244-260, July.
    2. de Haan, Leo & Hinloopen, Jeroen, 2003. "Preference hierarchies for internal finance, bank loans, bond, and share issues: evidence for Dutch firms," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 661-681, December.
    3. SAU, Lino, 2007. "New Pecking Order Financing for Innovative Firms: an Overview," MPRA Paper 3659, University Library of Munich, Germany.
    4. Boyd, John H. & Jalal, Abu M., 2012. "A new measure of financial development: Theory leads measurement," Journal of Development Economics, Elsevier, vol. 99(2), pages 341-357.
    5. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Marco Stampini & Benjamin Davis, 2003. "Discerning Transient from Chronic Poverty in Nicaragua: Measurement with a two period panel data set," Working Papers 03-03, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    7. M. E. Bontempi & R. Golinelli, 2001. "Is financial leverage mean-reverting? Unit root tests and corporate financing models," Working Papers 422, Dipartimento Scienze Economiche, Universita' di Bologna.
    8. Maria Elena Bontempi & Silvia Giannini & Roberto Golinelli, 2005. "Corporate Tax Reforms and Financial Choices: An Empirical Analysis," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 271-294, November.
    9. Bontempi, Maria Elena & Prodi, Giorgio, 2009. "Entry strategies into China: The choice between Joint Ventures and Wholly Foreign-Owned Enterprises: An application to the Italian manufacturing sector," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 11-19, January.
    10. Maria Elena Bontempi & Roberto Golinelli, 2012. "The effect of neglecting the slope parameters’ heterogeneity on dynamic models of corporate capital structure," Quantitative Finance, Taylor & Francis Journals, vol. 12(11), pages 1733-1751, November.
    11. repec:eee:quaeco:v:66:y:2017:i:c:p:57-69 is not listed on IDEAS
    12. Zhao, Jianmei & Katchova, Ani L. & Barry, Peter J., 2004. "Testing The Pecking Order Theory And The Signaling Theory For Farm Businesses," 2004 Annual meeting, August 1-4, Denver, CO 20215, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

    More about this item


    Trade-off theory; Pecking-order theory; Free cash-flow hypothesis; Dynamic panel data; Error correction mechanism model.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models


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