Testing the pecking order theory of capital structure

The pecking order theory of capital structure is among the most influential theories of corporate leverage

When outside funds are necessary, firms prefer debt to equity because of lower information costs associated with debt issues

These key claims do not match the evidence for publicly traded American firms, particularly during the 1980s and 1990s

Particularly striking is the fact that net equity issues trackthe financing deficit much more closely than do net debt issues

The pecking order theory

The pecking order is offered as a highly parsimonious empirical model of corporate leverage that is descriptively reasonable

Of course, 157 firms is a relatively small sample from the set of all publicly traded American firms

It is therefore important to understand whether the pecking order theory is broadly applicable

The two suspections of the pecking order

First, we provide evidence about the broad patterns of financing activity. This provides the empirical context for the more formal regression tests. It also serves as a check on the significance of external finance and equity issues

Second, we examine a number of implications of the pecking order in the context of Shyam-Sunder and Myers’ (1999) regression tests

Finally, we check to see whether the pecking order theory receives greater support among firms that face particularly severe adverse selection problems

The three elements of analysis

The financing deficit is constructed from an aggregation of dividends, investment, change in working capital and internal cash flows

Under the pecking order, each component of financing deficit should have the predicted dollar-for-dollar impact on corporate debt

The evidence does not support this hypothesis

Examples to reject the pecking order(1)

According to the pecking order theory, financing behavior is driven by adverse selection costs. The theory should perform best among firms that face particularly severe adverse selection problems

Small high-growth firms are often thought of as firms with large information asymmetries

Contrary to this hypothesis, small high-growth firms do not behave according to the pecking order theory

In fact, the pecking order works best in samples of large firms that continuously existed during the 1970s and the 1980s

Examples to reject the pecking order (2)

The pecking order theory predicts that high-growth firms, typically with large financing needs will end up with high debt ratios because of a manager’s reluctance to issue equity

Smith and Watts (1992) and Barclay et al. (2001) suggest precisely the opposite

High-growth firms consistently use less debt in their capital structure

Examples to reject the pecking order (3)

Model(1)

Theory Shyam-Sunder and Myers (1999) argue that under the pecking

order hypothesis, after an Initial Public Offering (IPO), equity issues are only used in extreme circumstances. The empirical specification is thus given as

假設 1: 股權融資在極端情況下使用（ a=0,bpo=1 ）（ 2 ）

（ 3 ）We try both approaches and find that empirically the current portion of long-term debt does not appear to belong in the definition of DEFit:

2.1. Using the same information: disaggregation of the financing deficit Is the aggregation step justified? 假設 2: 如果融資順序理論是正確的，則在回歸中將其拆分成幾個變量都不影響結果（ ）

Theory

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2.2. Using other information to account for leverage

Theory

假設 3:融資順序理論採用一種新的方式來解釋負債率，為了檢測其和傳統的理論哪個的解釋力更強，作者將兩者合併進行回歸檢測哪個變量的係數更大更顯著

At the heart of the conventional empirical analysis is a regression of leverage onfour factors: tangibility of assets (denoted T), market-to-book ratio (denoted MTB),log sales (denoted LS), and profitability (denoted P).

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TangibilityHarris and Raviv (1991), under the pecking order theory, one might

expect that firms with few tangible assets would have greater asymmetric information problems. Harris and Raviv argue that the pecking order predicts that bT<0

A more common idea is based on the hypothesis that collateral supports debt. It is often suggested that tangible assets naturally serve as collateral. Hence, collateral is associated with increased leverage

The usual prediction is that bT > 0

Theory

Market-to-book ratioFirms with high market-to-book ratios are often thought to have

more future growth opportunitiesMyers (1977), there may be a concern that debt could limit a firm’s

ability to seize such opportunities when they appearGoyal et al. (2002) find that when growth opportunities of defense

firms decline, these firms increase their use of debt financing

The common prediction is that bMTB<0

Theory

SizeLarge firms are usually more diversified, have better reputations in

debt markets ,and face lower information costs when borrowing. Therefore, large firms are predicted to have more debt in their capital structures.

The prediction is that bLS > 0

Theory

ProfitabilityIn many asymmetric information models, such as Ross (1977),

profitable firms are predicted to have higher leverage. But Titman and Wessels (1988) and Fama and French (2002) show that this is not a common finding.

MacKay and Phillips (2001), the literature finds profits and leverage to be negatively correlated

We expect to find that bP<0

Theory

Compustat, 1971-1998參考上一篇：排除金融公司，受監管的公司還有涉及併購的公司將資料進行修剪（去除極端的 0.5% ）後以百分比呈現額外條件：1. 公司有合併現金或是短期投資的狀況則標記為０2. 表中標記綠色符號的若有缺失資料或者跟其他數據合併也標記為０

Data

與資產負債表的資產相反 , 在此期間負債方面相當穩定 !

過去 30 年有多種不同的報表格式，本文將其合併成公用格式 1988 年報表形式改變，使用現金流表示。但是資金流動內容結構複雜，附錄Ａ有較清楚的明細。 其中作者認為股本數量可能包含 IPO 訊息，但是驗證結果其實 IPO 影響不大 外部融資從 80 年後大量上升

實際驗證

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淨權益發行的增長速度比淨債務發行的速度更快。在 1980, 特別是 1990 年代 , 小型公司使用比大公司相對更多的股權融資

1.Myers(2001) 說明融資順位理論優點是可以解釋外部融資大多採取債務形式，但根據實證結果其實相左，大量的外部融資反而是採取股權的形式。 Graham(2000) 與Minton(2001) 以及 Zender(2001) 有進一步的證明2. 說明留存收益對外部融資的重要性， Myers(2001) 認為大多數投資是利用內部現金流，但結果在 80~90 年代間並非如此，隨著時間推移，內部現金流作為融資來源的相對重要性下降。

兩大貢獻

圖 1 顯示淨債務和淨權益相對於整個 1971-1998 年期間融資資產的變化作用。在融資順位下，預期債務會比權益在融資定義上更密切。淨股權和融資定義的相關性為 0.8 ，而融資定義和淨長期債務監相關性僅 0.48

支持 peckin order theory.

Broader population of firms, accounts for the broader population of firm that exist over the subsequent five years.Restricted set of firms, accounts for the debt issuing decisions of the surviving members of the selected sample over the next five years.

Attrition rate of the select sample of firms is rather high, predictability is good, pecking order theory does not predict which firms will survivors.

The 768 firms that reported continuously during 1971–1989 were large. Their bookvalue of assets is almost twice that of the

broader population of firms. These firms also issue significantly higher amounts of debt

and significantly lower amounts of equity. The R2 on the hold out samples show that fitted equations

from the period 1971–1989 have a very limited ability to forecast leverage behavior during the next five years.

How did the firms with no gaps in the reporting of funds flow data differ from thebroader population?

Are the results specific to a particular time period?Comparing table 3 & table 4 show that support for the pecking order theory was weeker in the 1990s

相對支持融資順位聚合步驟

總債務系數是負數，是因為股利支付公司發行的長期債務較少

Tade off also predict a positiverelation between dividents and debt.

Shyam-sunder & Myers 1999, include the current portion of long-.term debt. Now illustrates why it was dropped. The sigh is negative and very small. This is not at all what is predicted by pecking order theory.

基于 1971-1998 年期間，最小公司不遵循融資順位，但中型公司中最大的公司有些融資順位。表 6 最後 4 列提供 1990-1998 期間的證據。融資順位的支持顯著下降。在 20 世紀 90 年代，只有最高的 4 分之 1 的公司完全支持。 在列 5 & 6 中，保持樣本預測明顯比樣本 R2 建議的預測更差。與列 9 & 10 一致。表明 1990 年代期間公司債務發行行為發生變化，這表明除了公司規模之外，時間周期對於融資順位的測試也很重要。早期幾十年的大公司最支持融資順位理論，而較小的高增長公司提供了最強烈的拒絕理由。即使對於大型公司，融資順位的支持在

20 世紀 90 年代降低。

添加榮和定義和滯後槓桿，對於等式沒有增加。與 Fama & French 2002 一致，它們認為公司槓桿的平均回歸令人驚訝的弱。

融資順位理論僅在解釋較早年份和大公司時比較有效。融資順位理論雖然多了一些額外的解釋力，但無法取代傳統模型。對於 1980~1990 期間上市且不遵循融資順位理論的小公司，是造成支持融資順位理論下降的主因。（但時間效應並非此原因引起）雖然融資順位理論有許多問題存在，但是對於融資赤字的解釋能力依然有相關性，許多大公司在進行財務槓桿調整時依然會最為參考依據。

5. Conclusions