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Testing the Efficiency of Classic Theories of Capital Structure in Bank-oriented Financial Systems

Author

Listed:
  • Pecina Ena

    (Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia.)

  • Krištić Irena Raguž

    (Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia.)

  • Sabol Andrija

    (Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia.)

Abstract

This paper tests the empirical power of the trade-off and pecking order theories in explaining the financial behaviour of companies in bank-oriented financial systems. These theories, developed and tested mainly in market-oriented, highly developed countries, are evaluated for their relevance in different environments. In this study, panel data analysis was performed on 16,881 companies from Bosnia and Herzegovina, Croatia, Macedonia, Serbia, and Slovenia over the period 2009–2016, using the Shyam-Sunder and Myers (1999) methodology. The findings suggest that the pecking order theory partly explains the financial policies of companies in EU countries (Croatia and Slovenia), while companies in non-EU countries (Bosnia and Herzegovina, Macedonia, Serbia) exhibit target-adjustment behaviour. Subsample analysis reveals that unquoted and medium-sized firms tend to follow the pecking order in financing, whereas quoted and large firms focus on maintaining target leverage levels. However, the results show that neither the coefficients nor the R2 values align with theoretical predictions or comparable empirical studies, particularly those on U.S. companies. This raises doubts about the applicability of classical capital structure theories to firms in varying contexts, highlighting the need for further research into additional influencing factors.

Suggested Citation

  • Pecina Ena & Krištić Irena Raguž & Sabol Andrija, 2025. "Testing the Efficiency of Classic Theories of Capital Structure in Bank-oriented Financial Systems," Zagreb International Review of Economics and Business, Sciendo, vol. 28(2), pages 129-154.
    • Handle: RePEc:vrs:zirebs:v:28:y:2025:i:2:p:129-154:n:1007
    DOI: 10.2478/zireb-2025-0019
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    References listed on IDEAS

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    JEL classification:

    • 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

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