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

de Jong, A., Verbeek, M. and Verwijmeren, P. (2010) The impact of financancing surpluses and large financing deficits on tests of the pecking order theory. Financial Management, 39(2), pp. 733-756. (doi: 10.1111/j.1755-053X.2010.01090.x)

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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Verwijmeren, Professor Patrick
• Authors: de Jong, A., Verbeek, M., and Verwijmeren, P.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Financial Management
• Journal Abbr.: FM
• ISSN: 0046-3892
• ISSN (Online): 1755-053X
• Published Online: 22 June 2010