Financing Frictions and the Substitution between Internal and External Funds

2010 ◽  
Vol 45 (3) ◽  
pp. 589-622 ◽  
Author(s):  
Heitor Almeida ◽  
Murillo Campello
Keyword(s):  
Order Theory ◽  
External Financing ◽  
Pecking Order Theory ◽  
Ample Evidence ◽  
Financing Costs ◽  
Financing Frictions ◽  
Negative Effect ◽  
Internal Funds ◽  
External Funds ◽  
Financing And Investment

AbstractAmple evidence points to a negative relation between internal funds (profitability) and the demand for external funds (debt issuance). This relation has been interpreted as evidence supporting the pecking order theory. We show, however, that the negative effect of internal funds on the demand for external financing is concentrated among firms that are least likely to face high external financing costs (firms that distribute large amounts of dividends, that are large, and whose debt is rated). For firms on the other end of the spectrum (low payout, small, and unrated), external financing is insensitive to internal funds. These cross-firm differences hold separately for debt and equity, and they are magnified in the aftermath of macroeconomic movements that tighten financing constraints. We argue that the greater complementarity between internal funds and external financing for constrained firms is a consequence of the interdependence of their financing and investment decisions.

scholarly journals Financial frictions and substitution between internal and external funds in publicly traded Brazilian companies

2012 ◽  
Vol 23 (58) ◽  
pp. 19-32 ◽  
Author(s):  
Márcio Telles Portal ◽  
João Zani ◽  
Carlos Eduardo Schönerwald da Silva
Keyword(s):  
Cash Flow ◽  
Financial Frictions ◽  
Negative Relationship ◽  
Investment Decisions ◽  
Order Theory ◽  
Publicly Traded ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Internal Funds ◽  
External Funds

The present study aimed to document the effects of financial constraints on the negative relationship between cash flow and external funds, a phenomenon associated with the Pecking Order Theory. This theory suggests that companies subject to more expensive external funds (financially constrained firms) should demonstrate a stronger negative relationship with cash flow than companies subject to minor financial frictions (financially unconstrained firms). The results indicate that the external funds of constrained firms consistently present less negative sensitivity to cash flow compared with those of unconstrained companies. Additionally, the internal funds of constrained companies demonstrate a positive sensitivity to cash flow, whereas those of unconstrained companies do not show any such significant behavior. These results are in accordance with the findings of Almeida and Campello (2010), who suggest the following: first, because of the endogenous nature of investment decisions in constrained companies, the complementary relationship between internal and external funds prevails over the substitutive effects suggested by the Pecking Order Theory; and second, the negative relationship between cash flow and external funds cannot be interpreted as evidence of costly external funds and therefore does not corroborate the Pecking Order Theory.

scholarly journals Determinants of Capital Structure in the Construction Companies across Europe and Central Asia Region

2020 ◽  
Author(s):  
Hakan Bal
Keyword(s):  
Capital Structure ◽  
Central Asia ◽  
Fixed Ratio ◽  
Order Theory ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Dummy Variables ◽  
Construction Companies ◽  
Negative Effect ◽  
Central Asia Region

This study examines the effects of asset tangibility, profitability, size and liquidity on capital structure (debt leverage) across the construction companies operating in in Europe and Central Asia region using the data between 1993 and 2019. The study documents that the capital structure and other financial ratios under study differ across countries, even in the same industry. Book leverage is found to be significantly negatively related to asset tangibility, profitability and liquidity in accordance with pecking order theory. In particular, fixed ratio has a negative effect on debt ratio in Russia and Romania, but no effect in other countries under study. The effect of size disappears when time dummy variables are introduced.

scholarly journals Labor and Capital Dynamics under Financing Frictions*

2018 ◽  
Vol 23 (2) ◽  
pp. 279-323 ◽  
Author(s):  
Ryan Michaels ◽  
T Beau Page ◽  
Toni M Whited
Keyword(s):  
Wage Bargaining ◽  
Reduced Form ◽  
Probability Of Default ◽  
External Financing ◽  
Financing Costs ◽  
Financing Frictions ◽  
Investment And Financing ◽  
Unemployment Risk

Abstract We assemble a new, quarterly panel dataset that links firms’ investment and financing to their employment and wages. In the data, wages and leverage are negatively related, both cross-sectionally and within firms. This pattern contradicts models in which firms insure workers against unemployment risk. We reconcile this fact with a model that integrates factor adjustment frictions and wage bargaining with costly external financing. In the model, the probability of default rises with debt. Because default incurs deadweight costs, the expected surplus over which firms and workers bargain falls, thus depressing wages. We show that raising financing costs reduces employment and wages, in line with recent reduced-form evidence.

scholarly journals COMPARATIVE STUDY OF THE RELEVANCE OF EQUITY FINANCING IN EUROPEAN SMES

2020 ◽  
Vol 21 (6) ◽  
pp. 1543-1560
Author(s):  
Monika Wieczorek-Kosmala ◽  
Joanna Błach ◽  
Joanna Trzęsiok
Keyword(s):  
Order Theory ◽  
Equity Financing ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Eu Countries ◽  
Internal Funds ◽  
Financing Gap ◽  
External Equity ◽  
The Eu ◽  
Academic Debate

This paper contributes to the academic debate on the pecking order theory and SMEs equity financing, in this equity financing gap. In order to address this problem, this study relies on the empirical design that is driven by the premises of the pecking order theory and distinguishes between the relevance of internal funds vs. external equity. The main aim of this study is to investigate whether the relevance of equity financing for European SMEs is driven by the country-specifics (captured by the clusters of the EU countries) and whether there are any other factors that may potentially explain the relevance of internal funds or external equity, with respect to SMEs performance and characteristics. For that purposes the SAFE survey data were used to run non-parametric and correlations analysis. The results have clearly indicated that there are statistically significant differences between the clusters of the EU countries (if we differentiate between core and peripheral EU countries in particular). It was also found that there is no unified pattern of the associations between the relevance of equity financing and SMEs performance and characteristics, thus these associations seem to be influenced by the country-specifics as well.

scholarly journals Effect of Solvency and Liquidity on The Profitability of Property Companies Listed on The Sharia Stock Index 2018-2020

2022 ◽  
Vol 5 (2) ◽  
Author(s):  
Wibowo Isa ◽  
Mei Candra Mahardika
Keyword(s):  
Order Theory ◽  
Least Square ◽  
Stock Index ◽  
Pecking Order ◽  
Current Ratio ◽  
Pecking Order Theory ◽  
Ordinary Least Square ◽  
Common Effect ◽  
Property Companies ◽  
Negative Effect

<p><em>This study analyzes the effect of Solvency and Liquidity on the profitability of property companies listed on the Indonesian Islamic stock index for the 2018-2020 period. This research is quantitative research with secondary data from financial reports from 2018 to 2021. Regression model analysis using Common Effect Model (CE) or Ordinary Least Square (OLS) method. The findings show that DAR has a negative effect on ROA, which explains that debt will burden the company and reduce the profit level of Islamic property companies. On the other hand, DAR has no effect on ROE because debt does not affect the value of equity owned by the company itself. DER has no effect on ROA and ROE, this is certainly contrary to the Pecking Order Theory. Current Ratio has a negative effect on ROA, this is not in accordance with </em><em>Pecking Order Theory</em><em>. Cash ratio has a positive effect on ROA and also on ROE, and is in accordance with </em><em>Pecking Order Theory</em><em>. The cash ratio as the company's ability to pay short term has a positive influence, because the company is not limited to being responsible for the environment around the company but also socially responsible to the community.</em></p><p> </p><p>Penelitian ini menganalisis pengaruh Solvabilitas dan Likuiditas terhadap profitabilitas perusahaan properti yang terdaftar di indeks saham syariah Indonesia periode 2018-2020. Penelitian ini menggunakan pendekatan kuantitatif dengan data sekunder dari laporan keuangan tahun 2018 sampai dengan tahun 2021. Analisis model regresi menggunakan metode Common Effect Model (CE) atau Ordinary Least Square (OLS). Hasil analisis menunjukkan bahwa DAR berpengaruh negatif terhadap ROA,  yang menjelaskan bahwa utang akan membebani perusahaan dan mengurangi tingkat keuntungan perusahaan properti syariah. Di sisi lain, DAR tidak berpengaruh terhadap ROE karena hutang tidak mempengaruhi nilai ekuitas yang dimiliki oleh perusahaan itu sendiri. DER tidak berpengaruh terhadap ROA dan ROE, hal ini tentunya bertentangan dengan Pecking Order Theory. Besarnya ekuitas utang secara khusus tidak berdampak pada tingkat keuntungan perusahaan properti. Current Ratio berpengaruh negatif terhadap ROA, hal ini tidak sesuai dengan Stakeholder Theory. Kondisi ini menyebabkan Current Ratio berpengaruh negatif terhadap ROE. Cash ratio berpengaruh positif terhadap ROA, dimana Cash Ratio berpengaruh positif terhadap ROE, dan sesuai dengan Stakeholder Theory. Rasio kas sebagai kemampuan perusahaan untuk membayar jangka pendek memiliki pengaruh positif, karena perusahaan tidak sebatas bertanggung jawab terhadap lingkungan sekitar perusahaan tetapi juga bertanggung jawab secara sosial kepada masyarakat.</p><p><em> </em><em></em></p><br /><p class="MsoNormal" style="text-align: justify; border: none; mso-padding-alt: 31.0pt 31.0pt 31.0pt 31.0pt; mso-border-shadow: yes;"><input id="ext" type="hidden" value="1" /><input id="ext" type="hidden" value="1" /></p>

scholarly journals Internal or External Financing: New Evidence on Investor Reaction in Indonesian Manufacturing Firms

2021 ◽  
Vol 22 (2) ◽  
Author(s):  
Rifki Fikasari ◽  
Yustrida Bernawati
Keyword(s):  
Order Theory ◽  
Manufacturing Firms ◽  
Least Square ◽  
Internal Source ◽  
External Financing ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Internal Financing ◽  
Retained Earnings ◽  
Investor Reaction

Research aims: This study aims to examine investor reaction to financing sources due to its pecking order theory hierarchy.Design/Methodology/Approach: This research used a purposive sampling method of manufacturing listed firms on the Indonesia Stock Exchange, which were tested utilizing Ordinary Least Square and SPSS software.Research findings: The results showed that the investor reacted negatively to internal financing measured by the firm's retained earnings. Conversely, this research found that investors reacted positively to external financing in measurement, leverage, and equity issuance. Furthermore, the results revealed that leverage had a more positive reaction than equity issuance.Theoretical contribution/Originality: This research contributes to the pecking order theory literature to test how investor reacts to which source of financing is chosen due to its hierarchy. There is evidence that Indonesian manufacturing firms had inadequate internal financing, which made investors react negatively, and investors tended to choose leverage over equity as external financing.Practitioner/Policy implication:  Our study contributes to the firm's management to carefully choose financing sources to fulfill the investor interest. This research also suggests that the firm produces more profit to provide adequate internal source financing as the research results showed that investors preferred internal than external financing. Furthermore, when there is inadequate internal financing, the firm's management should use leverage over equity.Research limitation/Implication: First, our study employed total liability rather than debt to leverage measurement. Second, our study only provided evidence of negative reactions to show that the firm failed to provide adequate internal financing sources rather than examined the level of adequate internal financing sources.

The Effect of Financial Reporting Quality on Financing and Investment

2016 ◽  
Vol 4 (3) ◽  
pp. 113-120
Author(s):  
Windy Angela ◽  
Rilya Aryancana
Keyword(s):  
Financial Reporting ◽  
Quantitative Research ◽  
Reporting Quality ◽  
The United States ◽  
Financial Reporting Quality ◽  
Library Research ◽  
Domestic Capital ◽  
Financing Frictions ◽  
Negative Effect ◽  
Financing And Investment

Objective - This study examines the effect of financial reporting quality on financing and investment of 15 large Indonesian companies that may still be under-investing in relation to its regional peers. Methodology/Technique - This research uses the quantitative research technique which involves field search, library research and statistical methods. Findings - The results suggest that (1) financial reporting quality has negative effect on financing (2) financial reporting quality has positive effect on investment among companies with higher likelihood of over-investing and negative effect on investment among those with higher likelihood of under-investing. Novelty - This research is complementary to previous researchers because they use financial reporting data of companies located in the United States whose domestic capital markets remain the largest and deepest globally. This might affect the degree of information asymmetry and financing frictions that companies face and hence, lead to an upward bias of the effect. Meanwhile, this research is conducted in Indonesia whose non-financial companies obtain nearly 50% of their financing from abroad via loans, bonds, and other credit. Type of Paper - Conceptual Type of Paper - Financial reporting quality; Financing; investment; Likelihood of over-investing; Likelihood of under-investing.

scholarly journals Descendants of Financing Decision with Reference to Capital Structure: An Empirical Analysis of Indian SMEs

2020 ◽  
Vol 47 (1) ◽  
pp. 33-42
Author(s):  
Sunaina Kanojia ◽  
Vipin Aggarwal ◽  
Ankush Bhargava
Keyword(s):  
Capital Structure ◽  
Small And Medium Enterprises ◽  
Negative Relationship ◽  
Order Theory ◽  
External Financing ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Developed Economies ◽  
Business Operations ◽  
Medium Enterprises

The article attempts to address the descendants especially in case of small and medium enterprises (SMEs) who do business with humongous constraints and largely manage the functions with own skills rather than relying on theories of finance. The study gives a deep insight on the pattern of financing of listed SMEs in India based on the financial information of 428 SMEs and further analysis of financial statements being conducted by generating financial ratios and debt components during the year 2014–2018. The study has been conducted under the reference of different capital structure theories and results have found to be significant in line with the pecking order theory, that is, SMEs utilise profit to ease their debt level and emerging organisations deploy more debt since they require more funds. The startling observation comes in terms of size where SMEs are found to be relatively small and less dependent on external financing to increase the size of the company due to the negative relationship resulting from the analysis of all forms of debt, this result is in nonconformity with the other studies done on the SMEs of developed economies. Informational asymmetry prevails in the Indian SMEs due to smaller size and more control in the hands of few managers. Growth as a parameter has shown reliance on short-term debt for overall financing of the business operations. Overall, study concludes that financing condition of the SMEs in India is still in nascent stages and new avenues of financing must be explored to solve the problems of financing in India.

scholarly journals Insiders’ response to market valuation, and the timing of equity-debt dual issues by Japanese firms

2011 ◽  
Vol 8 (4) ◽  
pp. 275-290
Author(s):  
Ammar M. Eltayeb
Keyword(s):  
Market Timing ◽  
Order Theory ◽  
Market Valuation ◽  
Pecking Order ◽  
Stock Valuation ◽  
Pecking Order Theory ◽  
Equity Issues ◽  
Financing Decisions ◽  
Japanese Firms ◽  
Internal Funds

This paper examines the mutual effects of market valuation and firm’s internal performance on insiders’ response to stock valuation, and on their financing decision. Estimates of logit equations explaining the financing decisions of JASDAQ firms 1999-2010 reveal some interesting patterns. Consistent with the pecking-order theory, when insiders perceive the stock is overvalued, they are more likely to issue dual or debt only, after fully utilize internal funds. Further, when insiders think that the stock is correctly valued concomitantly with outstanding internal performance, they are more likely to issue debt or dual rather than equity only. Conversely, consistent with the market-timing theory, insiders focus mainly on equity issues when they believe the stock is correctly valued but firm performance is relatively low. Moreover, firm size and tangibility of assets are decisive characteristics for dual issuers.

scholarly journals The effect of stock prices, return on assets, and firm size on dividend payout ratio: evidence from Indonesian financial service companies

2020 ◽  
Vol 3 (1) ◽  
pp. 17-27
Author(s):  
Mira Septiani ◽  
Nafiah Ariyani ◽  
Heri Ispriyahadi
Keyword(s):  
Firm Size ◽  
Stock Prices ◽  
Stock Price ◽  
Fixed Effects ◽  
Order Theory ◽  
Return On Assets ◽  
Pecking Order Theory ◽  
Dividend Payout ◽  
Growth Opportunity ◽  
Negative Effect

This paper aims to investigate the effect of stock prices, return on assets (ROA), and firms size on dividend payout ratio (DPR). We used 5-year annualized panel data from 2014 to 2018 of 17 financial sector companies listed in the Indonesian Stock of Exchange (IDX) as sample of this study. Analysis using three regression estimations (pooled OLS, fixed effects, and random effects) showed that stock price positively affects DPR. On the other hand,  both ROA and firm size has a negative effect on DPR. These result suggests that more substantial and higher profit companies prefer to retain their earnings for financing an investment as a growth opportunity than to distribute their income as a dividend. Thereby, this agrees with the pecking order theory.

Sign in / Sign up

Export Citation Format

Share Document