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The choice of external financing source: The role of company size and stock liquidity

Author

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  • Stereńczak Szymon

    (Department of Corporate Finance, Poznań University of Economics and Business, al. Niepodległości 10, 61-875 Poznań, Poland.)

  • Kubiak Jarosław

    (Department of Corporate Finance, Poznań University of Economics and Business, al. Niepodległości 10, 61-875 Poznań, Poland)

Abstract

This paper aims to answer whether firms of different sizes and stock liquidities differ in the choice of external sources of financing in companies listed in CEE countries. To this end the net debt issuance is regressed on the financial deficit. In regressions Pecking Order Coefficients are allowed to vary across firms with different sizes and stock liquidities. The results indicate that companies with less liquid shares prefer issuing debt to cover financial deficits more than companies with more liquid shares. This implies that stock liquidity may substitute debt issuance in alleviating the adverse effects of information asymmetry, especially in relatively small companies. This is the first study in which the relationship between liquidity and debt-equity choice is considered solely from a pecking order theory point of view. Also this is the first study in which stock liquidity effects on capital structure are studied in the CEE countries. Research results may point to the advantages of increasing the liquidity of shares which may contribute to reducing information asymmetry and thus a better allocation of resources.

Suggested Citation

  • Stereńczak Szymon & Kubiak Jarosław, 2023. "The choice of external financing source: The role of company size and stock liquidity," Economics and Business Review, Sciendo, vol. 9(3), pages 44-65, October.
    • Handle: RePEc:vrs:ecobur:v:9:y:2023:i:3:p:44-65:n:4
    DOI: 10.18559/ebr.2023.3.800
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    References listed on IDEAS

    as
    1. Mohd Ashari Bakri & Bany-Ariffin Amin Nordin & Bolaji Tunde Matemilola & Lau Wei Theng, 2020. "Moderating Role of Financial Market Development on the Relationship between Stock Liquidity and Dividend," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 16(2), pages 77-99.
    2. Pham, Thu Phuong & Singh, Harminder & Vu, Van Hoang, 2023. "The impact of bank loan announcements on stock liquidity," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 848-864.
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    4. repec:eme:mfppss:mf-08-2020-0417 is not listed on IDEAS
    5. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    6. Shen, Carl Hsin-han, 2014. "Pecking order, access to public debt market, and information asymmetry," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 291-306.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    stock liquidity; debt-equity choice; external financing; financial deficit; pecking order theory;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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