scholarly journals Does information asymmetry lead to higher debt financing? Evidence from China during the NTS Reform period

2018 ◽  
Vol 25 (1) ◽  
pp. 109-121 ◽  
Author(s):  
Wenzhou Qu ◽  
Udomsak Wongchoti ◽  
Fei Wu ◽  
Yanming Chen
Keyword(s):  
Capital Structure ◽  
Information Asymmetry ◽  
Transition Period ◽  
Order Theory ◽  
Asymmetry Index ◽  
Debt Financing ◽  
Pecking Order ◽  
Chinese Firms ◽  
Pecking Order Theory ◽  
Content Type

Purpose The purpose of this paper is to test an implication of the pecking order theory to explain capital structure decisions among Chinese listed companies during the 2005-2007 NTS Reform transition period. Design/methodology/approach The authors utilize direct proxies for information asymmetry based on microstructure models including Probability of the arrival of informed trades (PIN), Adverse selection component of the bid-ask spread (λ), Illiquidity ratio (ILLIQ) and liquidity ratio, and Information asymmetry index (InfoAsy) to examine their relation with firms’ debt financing. Findings Consistent with the prediction of Pecking Order Theory, the authors find that companies for which stock investors are challenged with more severe informational disadvantages are associated with higher degree of leverage use. Originality/value The study provides a more direct test on the positive relation between information asymmetry and financial leverage of Chinese firms. In contrast to previous findings by Chen (2004), the results suggest that capital structure choices among Chinese firms progressively conform to conventional finance theories (e.g. Pecking Order Theory) with the decline of non-tradable shares.

Pecking Order Test at Varying Debt Levels: A Comparative Study of Indian and Chinese Firms

2019 ◽  
Vol 18 (2) ◽  
pp. 237-261
Author(s):  
Vandana Bhama ◽  
Pramod Kumar Jain ◽  
Surendra Singh Yadav
Keyword(s):  
Capital Structure ◽  
Order Theory ◽  
Jel Classification ◽  
Short Term ◽  
Pecking Order ◽  
Chinese Firms ◽  
Pecking Order Theory ◽  
High Level ◽  
Very High ◽  
Debt Levels

The present study tests the pecking order of firms at varying debt levels. The findings indicate that deficit firms at low debt levels raise significant amounts of debt, thus indicating the adherence to the pecking order theory. Deficit firms (from both countries) at exceptionally high debt levels do not adjust their capital structure by issuing less debt. In a surplus situation, Chinese firms at very high level redeem the substantial debt because of the dominance of short-term debt in their capital structure. In contrast, Indian surplus firms hesitate to redeem more debt if their existing debt levels are extremely high. JEL Classification: Q14, G32

Does financing behavior of SME entrepreneurs of Bangladesh follow capital structure theory?-an investigation into Pecking Order Theory

2020 ◽  
pp. 2050037
Author(s):  
Md. Rostam Ali ◽  
Rustom Ali Ahmed ◽  
Rushafa Tasnim Tisha ◽  
Md. Ashikul Islam
Keyword(s):  
Capital Structure ◽  
Information Asymmetry ◽  
Order Theory ◽  
Bank Loan ◽  
Structure Theory ◽  
Primary Data ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Debt Market ◽  
Capital Structure Theory

This study attempts to investigate whether the financing preferences of small and medium enterprises (SMEs)’ entrepreneurs of Bangladesh follow capital structure theory by investigating into Pecking Order Theory (POT). For this study, cross-sectional primary data have been collected through questionnaire. The answers of the questions have been measured through five points Likert Scale. The scores were analyzed using mean score. To analyze the data, some descriptive statistics have been used. Besides, one sample one tail [Formula: see text]-test has been applied to test the hypotheses. The study finds that the entrepreneurs themselves do not believe that there is an information asymmetry in debt market. But their perception regarding debt market ascertained the presence of the information asymmetry between SME sector (entrepreneurs of SME) and the debt market (banks). The answers of respondents are statistically significant that they want to use the retained profits first, bank loan as second and want to issue external equity (taking partner/s) as a third option among these three alternatives of additional financing. This tendency of the respondents towards financing is consistent with POT. Therefore, Government policy for motivating SMEs to keep formal accounting should be introduced to reduce the information asymmetry in debt market along with taking proper initiatives to increase accessibility of SMEs to institutional credit.

scholarly journals The determinants of Sukūk issuance in GCC countries

2020 ◽  
Vol 28 (1) ◽  
pp. 25-45
Author(s):  
Imene Guermazi
Keyword(s):  
Social Responsibility ◽  
Capital Structure ◽  
Order Theory ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Content Type ◽  
Gcc Countries ◽  
The Social ◽  
Finance Theory ◽  
Corporate Social

PurposeThis paper focuses on Ṣukūk issuance determinants in Gulf Cooperation Council (GCC) countries. Given the dual characteristic of debt and equity of Ṣukūk as well as their unique benefits of social responsibility, the author questions whether the theories of capital structure, the trade-off and the pecking order are able to well explain the Ṣukūk issuance.Design/methodology/approachFirst, the author verifies these theories using capital structure determinants and regresses the Ṣukūk change on these determinants. Second, the author tests the trade-off theory with the target debt model and third, verifies the pecking order theory using the fund flow deficit model.FindingsThe empirical results show that capital structure determinants fail to explain both theories. The author confirms that the Ṣukūk change is significatively linked to the deviation from a Ṣukūk target. So, issuing firms balance the marginal costs of Ṣukūk and their benefits of religiosity and social responsibility toward a target debt. The author finds no evidence of the pecking order theory.Research limitations/implicationsThis study contributes to corporate finance theory and corporate social responsibility. It verifies if capital structure theories proved in conventional financing can well explain Islamic bonds issuance given their social responsibility benefits.Practical implicationsManagers and investors would pay attention to the social factors explaining Ṣukūk issuance in their finance and investment decisions. They would be enhanced to use this financing tool knowing its social unique benefits. This also should encourage governments to enhance this socially responsible financing. Rating agencies would be motivated to evaluate Ṣukūk and firms would improve the quality and relevance of disclosure to get the best rating.Social implicationsThe author highlights the social factors explaining Ṣukūk issuance and enhances corporate social responsibility (CSR).Originality/valueThe author extends the few literature testing capital structure theories for Islamic bonds and highlights the specific social responsible features of Ṣukūk that would bridge their issuance to capital structure theories. So the author enhances the concept of Islamic CSR. Tying capital structure theories to CSR would also help developing Islamic finance theory as a unique social responsible framework.

scholarly journals Debt Capacity And Debt Financing

2011 ◽  
Vol 6 (8) ◽  
Author(s):  
Richard H. Fosberg
Keyword(s):  
Capital Structure ◽  
Empirical Analysis ◽  
Significant Proportion ◽  
Order Theory ◽  
Debt Financing ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Credit Availability ◽  
Debt Capacity ◽  
Financial Deficits

The pecking order theory of capital structure predicts that firms will finance a significant proportion of their financial deficit (investments + dividends – operating cash flows) with debt capital.  I also hypothesize that the amount of debt financing a firm actually uses is also related to its unused debt capacity.  The empirical analysis in this study confirms that firms follow the pecking order theory in financing their financial deficits.  Further, it is shown that firms with more unused debt capacity finance more of their financial deficits with debt than other firms.  Specifically, the data indicates that firms with the most unused debt capacity finance approximately 50% of their financial deficits with debt while firms with less unused debt capacity finance approximately 25% of their financial deficits with debt.  The data also indicate that a failure to adjust for credit availability in an empirical analysis of financial deficit financing will significantly under estimate the degree to which firms follow the pecking order theory.  It is also confirmed that most firms seem to have a target capital structure but the actual firm debt ratio only reverts to the target at a rate of 5-10% per year.  Additionally, the data also shows that a combination of an investment grade credit rating and relatively low debt outstanding is a better proxy for credit availability than the more commonly used total assets.

scholarly journals Capital structure management differences in Latin American and US firms after 2008 crisis

2017 ◽  
Vol 22 (42) ◽  
pp. 51-74 ◽  
Author(s):  
Santiago Valcacer Rodrigues ◽  
Heber José de Moura ◽  
David Ferreira Lopes Santos ◽  
Vinicius Amorim Sobreiro
Keyword(s):  
Latin America ◽  
Capital Structure ◽  
Latin American ◽  
Order Theory ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Content Type ◽  
Determining Factors ◽  
Theoretical Assumptions ◽  
The Usa

Purpose This paper aims to analyse the capital structure determining factors of Latin American and US corporations after the crisis of 2008, as a means of comparing theoretical assumptions and empirical results in markets of different efficiency levels. Design/methodology/approach The study sample comprises 1,091 companies belonging to the six largest economies in Latin America plus the USA, in the years 2009 to 2013. The authors performed a regression with data from a balanced overview, which were obtained by using the criterion of minimum weighted square. Findings The results demonstrated differences in determining factors of capital structure between companies from Latin America and from the USA. The pecking order theory was mostly observed in Latin American companies and the trade-off theory greater was closely aligned with US firms. Originality/value This research brings new contributions to the issue, once the differences and determinative of the debt profile in companies from different economic contexts are compared.

Analysing capital structure of spanish chemical companies using self-organizing maps

Kybernetes ◽  
2017 ◽  
Vol 46 (06) ◽  
pp. 947-965 ◽  
Author(s):  
Xavier Camara-Turull ◽  
María Ángeles Fernández-Izquierdo ◽  
M. Teresa Sorrosal-Forradellas
Keyword(s):  
Capital Structure ◽  
Order Theory ◽  
Pecking Order ◽  
Self Organizing Maps ◽  
Pecking Order Theory ◽  
Content Type ◽  
Unsupervised Neural Network ◽  
Chemical Companies ◽  
Self Organizing ◽  
The Capital Structure

Purpose This paper aims to analyses the capital structure of the Spanish chemical industry during the period between 1999 and 2013, with a twofold objective. First, to determine whether the assumptions of pecking order theory are fulfilled throughout the study's timeframe. Second, by using data covering the years before the crisis and the worst years thereof, this study shows how the crisis has affected the capital structure of the companies included in this sample. Design/methodology/approach A particular kind of unsupervised neural network, self-organizing maps, is applied. This methodology allows to cluster firms avoiding the need to establish relationships between the different variables involved in the problem beforehand. Findings Companies are clustered into groups with different degrees of accomplishment of the pecking order theory. The hypothesis about risk is the one that experience a greater variation in the period before and after the crisis. Moreover, companies' capital structure has been lightly disrupted by the crisis. Originality/value The originality of this paper lies in applying an unprecedented methodology to the problem of capital structure. Therefore, the capital structure problem can be approached without setting any function relationship previously.

scholarly journals Capital Structure Theories in Finance Research: A Historical Review

2019 ◽  
Vol 3 (1) ◽  
pp. 11-19
Author(s):  
Lutfa T Ferdous
Keyword(s):  
Capital Structure ◽  
Capital Market ◽  
Historical Review ◽  
Order Theory ◽  
Debt Financing ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Structure Building ◽  
Debt Capacity ◽  
Bankruptcy Theory

Capital structure in one of the most converse and vital issues in the finance literature. This theoretical review of capital structure provides a synthesis of the theory utilised in capital structure literature. This theoretical review explains two categories of theories that examine the optimum capital structure of a firm. Functional market theories, which propose firms conduct share transaction without being used transaction costs and ii) costly transaction theories. The first group consists of the original capital structure theories of Modigliani and Miller (1958, 1963), Miller (1977), and De Angelo and Masulis (1980). The second range of theories captures the various effects of costly capital market transactions: Pecking Order Theory" accredited to Donaldson (1961); the debt capacity theories that depend on bankruptcy to limit a firm's use of debt financing (Robicheck and Myers, 1966) the agency models developed by Jensen and Meckling (1976), Myers (1977), Smith and Warner (1979); and signalling model by Ross (1977). Recent capital structure literature explored into an analytical structure building up the major contributions starting with the development of agency and bankruptcy theory. These theories are connected with the outcome from financing choices to real debt-equity decisions. Finally, we finish our review with established studies that explore the significances of leverage- equity relationship, as well as its determinants.

Testing the pecking order theory of capital structure in an Islamic legal system: the case of Saudi Arabia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Moncef Guizani ◽  
Ahdi Noomen Ajmi
Keyword(s):  
Stock Market ◽  
Capital Structure ◽  
Order Theory ◽  
Ordinary Least Squares ◽  
Financial Instruments ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Content Type ◽  
The Impact ◽  
The Capital Structure

Purpose The purpose of this paper is to examine whether the basic premises according to the pecking order theory (POT) provide an explanation for the capital structure mix of firms operating under Islamic principles. Design/methodology/approach Pooled ordinary least squares, fixed and random effects regressions were performed to test the POT applying data from a sample of 66 Islamic-compliant firms listed on Saudi Stock Market over the period 2006–2016. Findings The results show that sale-based instruments (Murabahah, Ijara) track the financial deficit quite closely followed by equity financing and as a last alternative to finance deficit, Islamic-compliant firms issue Sukuk. In the crisis period, these firms seem more reliant on equity, then on sale-based instruments and on Sukuk as last option. The study findings also indicate that the cumulative financing deficit does not wipe out the effects of conventional variables, although it is empirically significant. This provides no support for the POT attempts by Saudi Islamic-compliant firms Research limitations/implications This research contributes to the theory of capital structure in re-validating the findings of a previous theoretical and empirical study. It helps understand the capital structure of Islamic-compliant firms in comparison with conventional firms. It highlights some areas where further research on topics related to capital structure of Islamic-compliant firms is needed. The failure of the POT to explain Saudi firms’ financing choices strongly pushed researchers to test the market timing theory for the Saudi Stock Market. Further research studies could re-examine the trade-off theory in the absence of interest tax shield as in an Islamic economy. Practical implications From a managerial perspective, this research can serve firm executive managers in their financing decisions to add value to the companies. Furthermore, policymakers, bankers and standard-setting organizations should undertake more collective work to simplify the process of issuing Islamic financial instruments including Sukuk. Moreover, the Saudi Government has to encourage the private sector to be more innovative in developing products and services that are in line with Sharia principles. Finally, to attract investors, the Capital Market Authority has to encourage transaction, efficiency and liquidity of Islamic financial instruments. Originality/value The proposed study presents several originalities. First, it explores the implications of relevant Islamic principles on financing preferences of Saudi firms. Second, the present study enables us to investigate what the sudden abundance of liquidity, generated by the record levels of oil prices, implied for the firms’ financing behavior. Finally, it provides further evidence on the impact of financial crisis on the firms’ capital structure choice in a period of considerable slowdown in the world.

Impact of cash surplus on firm’s capital structure: validation of pecking order theory

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Barnali Chaklader ◽  
B. Padmapriya
Keyword(s):  
Capital Structure ◽  
Order Theory ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Content Type ◽  
Financial Variables ◽  
Factors Influencing ◽  
Short And Long Term ◽  
The Capital Structure

PurposeBuilding on pecking order theory, this study seeks to understand the various financial factors that influence top management's decision regarding the company’s capital structure. The authors attempt to understand and analyse whether the capital structure of mid‐ and small‐cap firms is affected by cash surplus scaled to total assets. Along with other determinants of capital structure such as liquidity, profitability, tangibility, market capitalisation and age, this is considered one of the major factors. Cash surplus is calculated using data from the cash flow statement. It is defined as the difference in cash from operating activities and that from investing activities and is scaled to total assets. To the best of the authors’ knowledge, this is the first study to regress cash surplus scaled to total assets and other determinants over leverage to examine the impact on mid‐ and small‐cap firms. The pecking order theory was found to hold for firms earning cash surplus.Design/methodology/approachData were collected from the CMIE Prowess database of all firms listed on the NIFTY Small cap 250 index and NIFTY Midcap 150 index. The data of non-financial firms belonging to the midcap and small-cap sector, listed on the National Stock Exchange of India from 2012 to 2019 were considered. After cleaning the data, an unbalanced panel of 171 companies totalling 1,362 observations for the NIFTY Small-cap 250 index and another panel of 96 companies with 761 observations for the NIFTY Midcap 150 index was created. Panel data regression analysis was used to determine the effect of cash surplus scaled to total assets on the firms' capital structure.FindingsThis study demonstrates how small- and midcap firms' behave differently in taking capital structure decisions. Pecking order theory was found to hold for firms earning cash surplus as a proportion of total assets (Surplusta).Research limitations/implicationsThe study was conducted through data available on secondary sources and database. The study can be better conducted by conducting a primary survey too. Further study may be conducted with a blend of secondary and questionnaire method. The results can be compared to check the similarity in findings.Practical implicationsManagers can benefit from the findings when making decisions on long- and short-term loans. This study can help managers in terms of the financial variables that have a role to play in the financial leverage of the company. The decision of the managers of midcap or small-cap firms would be different. Factors influencing short- and long-term borrowings are different. Academics can discuss whether there is any difference in the influence of capital structure variables of small- and midcap companies and the reasons for such differences. Judicious decisions on capital structure will create wealth for the shareholders as the right decision about leverage would result in a proper cost of capital. The findings also add to the existing literature on the Pecking order theory.Social implicationsAcademics can discuss whether there is any difference in the influence of capital structure variables of small- and midcap companies and the reasons for such differences.Originality/valueThe study extends the existing literature by demonstrating that the capital structure of mid and small-cap firms is affected by cash surplus scaled to total assets. The pecking order theory was found to hold for firms earning cash surplus. This study can inform the practitioners about the financial variables that have a role to play in the company's financial leverage. As the results and significance of the variables of the midcap or small-cap firms are different, the decisions of the managers of these firms would be separate for the capital structure of their firms. The study also infers that the factors influencing short and long-term borrowings are different. The study determines whether managers' decision-making in such companies is different in terms of raising short- and long-term loans. The study attempts to guide managers in considering the different variables that would influence their capital structure decisions, particularly the decision to include debt in the capital. Financial variables need not be of equal importance for managers belonging to small- and midcap companies.

scholarly journals The Interaction of Institutional Quality and Human Capital in Shaping the Dynamics of Capital Structure

2020 ◽  
pp. 63-87
Author(s):  
Enrico Santarelli ◽  
Hien Thu Tran
Keyword(s):  
Human Capital ◽  
Capital Structure ◽  
Institutional Quality ◽  
Order Theory ◽  
Debt Financing ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Trade Off ◽  
Tax Benefits ◽  
The Capital Structure

This chapter aims to find if trade-off theory or pecking order theory best explain the capital structure of non-state firms during the post-transition process in Vietnam. We investigate the effect of human capital, institutional quality, and their interaction on the capital structure decision. Findings suggest the capital structure of Vietnamese firms is a balance between the trade-off theory and the pecking order theory. Accessing formal debts is tough for young and non-state firms, whereas those with access to formal loans take advantage of their leverage tools to exploit the tax benefits against the costs of financial distress. Other findings include: (i) profitability and debt tax shields are no longer important when entrepreneurs adopt informal debt financing; (ii) high-quality institutions enable firms to reduce reliance on debt financing; (iii) while human capital encourages entrepreneurs to obtain more loans, its interaction with institutional quality deters debt financing and favours other financial sources.

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