The impact of financing surpluses and large financing deficits on tests of the pecking order theory

Research output: Contribution to journalArticleAcademicpeer-review

30 Citations (Scopus)

Abstract

This paper extends the basic pecking order model of Shyam-Sunder and Myers by separating the effects of financing surpluses, normal deficits, and large deficits. Using a panel of US firms over the period 1971-2005, we find that the estimated pecking order coefficient is highest for surpluses (0.90), lower for normal deficits (0.74), and lowest when firms have large financing deficits (0.09). These findings shed light on two empirical puzzles: 1) small firms, although having the highest potential for asymmetric information, do not behave according to the pecking order theory, and 2) the pecking order theory has lost explanatory power over time. We provide a solution to these puzzles by demonstrating that the frequency of large deficits is higher in smaller firms and increasing over time. We argue that our results are consistent with the debt capacity in the pecking order model.
Original languageEnglish
Pages (from-to)733-756
Number of pages24
JournalFinancial Management - FM
Volume39
Issue number2
DOIs
Publication statusPublished - 2010

Fingerprint

Dive into the research topics of 'The impact of financing surpluses and large financing deficits on tests of the pecking order theory'. Together they form a unique fingerprint.

Cite this