Testing the pecking order theory:the importance of methodology

Dimitrios VasiliouHellenic Open University, Patra, Greece

Nikolaos EriotisNational and Kapodistrian University of Athens, Athens, Greece, and

Nikolaos DaskalakisAthens University of Economics and Business, Athens, Greece

Abstract

Purpose – The purpose of this paper is to show that different methodologies may lead to differentimplications about the validity of the pecking order theory.

Design/methodology/approach – Using data from Greek firms as a starting-point, the paper firstinvestigates whether they follow the financing pattern implied by the pecking order theory and thenillustrates that conclusions concerning the pecking order should be carefully shaped by researchers, asthe methodology used can be misleading. Two different information sources are used; the first is dataderived from the financial statements of the Greek firms listed in the Athens Exchange, while thesecond comprises the answers to a detailed questionnaire.

Findings – It is shown that a negative relationship between leverage and profitability does notnecessarily mean that the pecking order financing hierarchy holds. Analysis should not rely solely onthe mean-oriented regression quantitative analysis to test the pecking order theory, as it refers to adistinct hierarchy.

Research limitations/implications – Further research should focus on investigating the reasonsthat underlie actual firm financing.

Practical implications – The fact that the pecking order is actually a hierarchy makes research inthis field more complex. Analysts should consider this special feature of the pecking order approachwhen analyzing the existence of the pecking order financing pattern. The methodology followed is ofcrucial importance in the analysis of the existence of the pecking order financing pattern.

Originality/value – To the authors’ knowledge, this is the first paper to test the pecking orderpattern of financing using simultaneously quantitative and qualitative data, and to compare resultsand conclusions drawn from these two different types of methodology.

Keywords Capital structure, Research methods, Financing, Greece

Paper type Technical paper

IntroductionEffective management of the financing procedure is vital for the financial welfare of thefirm. Firms manage their capital structure carefully. A false decision on capitalstructure may lead to financial distress and, eventually, to bankruptcy. However, theoptimal combination of the various financing sources has been a controversial topicsince its theoretical rise and the empirical investigations that have followed. So far, noexact formula exists to determine the optimal debt policy for a particular firm.Nevertheless, numerous theoretical approaches have been developed to analyze theimpact of alternative capital structures. These methods can be distinguished in two

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1755-4179.htm

Testing thepecking order

theory

85

Qualitative Research in FinancialMarkets

Vol. 1 No. 2, 2009pp. 85-96

q Emerald Group Publishing Limited1755-4179

DOI 10.1108/17554170910975900

distinct groups that prevail in capital structure theory: the pecking order theory andthe debt costs-benefits trade-off approach.

This paper shows that the methodology used to draw conclusions on the issue of thepecking order theory is very important. Using corporate data from Greek firms, weexamine whether they follow the financing pattern implied by the pecking order theoryand demonstrate that conclusions based on quantitative analysis alone should becarefully drawn when testing the pecking order financing application. Several authorsconclude that the predictions of the pecking order model are accurate on the basis of aninverse relationship existing between profitability and leverage. However, thisnegative relationship simply shows that internal funds are preferred to debt. This maymean that pecking order exists but it does not prove that it actually does. For thepecking order pattern to hold, debt should also be preferred to new equity, a hypothesisthat remains yet to be proven.

We use Greek corporate data in our analysis. We start with a discussion of Vasiliouet al. (2005) who find that firms generally finance their activities according to thefinancing procedure implied by the pecking order theory, but based on the result thatprofitability is negatively related to leverage. In this paper, we investigate this“indication” by thoroughly examining if pecking order theory does exist in capitalstructures of Greek firms. We use two different sources of information. The first refersto the data used in the empirical analysis of Vasiliou et al. (2005), derived from thefinancial statements of the Greek firms listed on the Athens Exchange (ATHEX)during the period 1997-2001, which we extend to December 2002, to match the secondset of data period. The second set of data consists of the answers to a detailedquestionnaire that was sent to all Greek firms listed in the ATHEX. The questionnairewas filled in and sent back during the period of 1 October 2002 until 31 January 2003.To the authors’ knowledge, this is the first paper to test the pecking order pattern offinancing using simultaneously quantitative and qualitative data, and to compareresults and conclusions drawn from these two different types of methodology.

The paper is organized as follows. In the next section, we review some of thetheoretical and empirical literature concerning the pecking order theory. In sectionthird, we test for statistical differences between the two samples. In section four, webriefly refer to the results and conclusions of the analysis conducted by Vasiliou et al.and we isolate the variable regarding the pecking order theory. In this section,we investigate whether firms prefer internal to external financing. In the fifth section,we focus more deeply on the firms’ financing preferences by analyzing the answers tothe questionnaires. The results are summarised in the last section.

Pecking order theory and corporate financing patternWe track the infancy of the pecking order hypothesis in Donaldson’s (1961) study.Donaldson (1961, p. 57) studied the financing practices of a sample of largecorporations and observed that “Management strongly favored internal generation asa source of new funds even to the exclusion of external funds except for occasionalbulges in the need for funds.” In case external capital was needed, managers generallyavoided to issue new stock:

Though few companies would go so far to rule out a sale of common under anycircumstances, the large majority had not had such a sale in the past 20 years and did notanticipate one in the foreseeable future. This was particularly remarkable in view of the very

QRFM1,2

86

high Price-Earnings ratios of recent years. Several financial officers showed that they werewell aware that this had been a good time to sell common, but the reluctance still persisted(Donaldson, 1961, pp. 57-8).

The initial conclusion of Donaldson was analysed later by Myers (1984) and Myers andMajluf (1984) who reached the following conclusion about the hierarchy of financingchoices: firms will first rely on internally generated funds (i.e. undistributed earnings),then they will turn to debt if additional funds are needed and finally they will issueequity to cover any remaining capital requirements.

There are two main rationales that have been advanced as explanations of thispattern in preferences:

(1) external financing transaction costs; and

(2) asymmetric information theory.

According to the first set of arguments, transaction costs associated with obtainingnew external financing play an important role in a firm’s capital structure decisions.Internal funds do not bear any transaction (or flotation) costs. Furthermore, the totaltransaction costs of new debt are typically lower than the total costs of obtaining othernew external financing (Emery and Finnerty, 1997, p. 481). Lee et al. (1996) calculatedthe average flotation costs for debt and equity in the 1990s using information from theSecurities Data Company. They found that flotation costs for common stock are morethan twice as high as those of new debt for all levels of amounts of capital raised.

According to the asymmetric information theory, internal financing avoids thescrutiny of suppliers of capital. If additional funds are needed then debt is preferredbecause debt issues are regarded as a positive signal by investors who possess lessinformation than managers. This conclusion (and empirical finding) is based on thebelief that management will never issue an undervalued security. Thus, if debt isissued, investors will assume that management believes that the stock is undervalued.Furthermore, according to Myers (1984, p. 584) under the asymmetric informationtheory, the pecking order pattern implies that the firm should “[. . .] issue the safestpossible securities – strictly speaking, securities whose future value changes leastwhen the manager’s inside information is revealed to the market”. The order is basedon value volatility, the favoured source being the least volatile, therefore leaving theorder of preferences (or “pecking order”) as: retained earnings; new debt; new equity.

An obvious implication of the pecking order theory is that highly profitable firmsthat generate high earnings are expected to use less debt capital than those that are notvery profitable. Several researchers have tested the effects of profitability on firmleverage. Kester (1986) and Friend and Lang (1988) conclude that there is asignificantly negative relationship between profitability and debt/asset ratios. Rajanand Zingales (1995) and Wald (1999) find a significantly negative relationship betweenprofitability and debt/asset ratios for the USA, the UK and Japan. The Greek marketdoes not seem to be an exception. Vasiliou et al. (2005) also find a negative relationshipbetween profitability and debt ratios.

However, the inverse relationship between profitability and leverage does not provethe existence of the pecking order theory. Rather, they provide an implication thatpecking order may exist. Specifically, this inverse relationship shows that internalfunds are preferred to debt. However, this does not mean that debt is preferred fromnew equity. Firms with high profitability may prefer internal financing to debt, but

Testing thepecking order

theory

87

how do they rank debt and new equity? The inverse relationship between profitabilityand debt ratios does not provide an unambiguous answer to this question.

The empirical accuracy of the pecking order model has been the focus of severalresearchers in recent years. Ever since Shyam-Sunder and Myers (1999) found supportfor the theory, there have been numerous studies that question the existence of thepecking order financing pattern. For example, Chirinko and Singha (2000) show thatthe empirical evidence of Shyam-Sunder and Myers (1999) may generate misleadinginferences when evaluating plausible patterns of external financing. Frank and Goyal(2003) test the pecking order theory of corporate leverage and provide evidence thatcontrary to the pecking order theory, net equity issues track the financing deficit moreclosely than do net debt issues. Bancel and Mittoo (2004) find only weak support forthe pecking order theory, while Fama and French (2005) show that financing decisionsseem to violate the central predictions of the pecking order model about how often andunder what circumstances firms issue equity. Galpin (2004) claims that the peckingorder does not describe the way that managers access external capital. On the otherhand, there are a number of recent studies that are supportive of a pecking order.Lemmon and Zender (2002) denote that the theory appears to be a good description ofthe financing policies of a large sample of firms, while DeMiguel and Pindado (2000)and Graham and Harvey (2001) also provide some support. Leary and Roberts (2008)show that approximately 36 per cent of their sample firms adhere to the peckingorder’s prediction of issuing debt before equity. Nevertheless, it seems thatthe existence of the pecking order pattern of financing still remains an ambiguousissue.

Testing the pecking order model’s predictions robustly is not an easy empiricaltask. The difficulty lies in the fact that the model suggests a hierarchy of financingsources. Thus, it is this hierarchy that needs to be checked to prove that the peckingorder exists. As already mentioned, a simple negative inverse relationship betweenleverage and profitability provides an implication rather than a proof that the peckingorder exists.

Examination of sample differencesIn this study, we use two different sets of data, derived from two different samples.These two samples come from the same population, which consists of the 331 Greekfirms listed in the ATHEX (on 30 September 2002). Thus, the first sample (denoted assample 1) contains 107 firms from the total population and the second sample (denotedas sample 2) consists of 89 firms. To draw safe conclusions based on the simultaneousexamination of these two different samples, we first need to prove that both samplesare (statistically) representative of the total population.

We use the x 2 goodness-of-fit test to examine whether both samples are representativeof the population based on the capital structure criterion. The procedure is thefollowing: We first calculate the annual long-term debt to equity ratio (i.e. the capitalstructure ratio) of each firm listed on the ATHEX[1]. This ratio is the mean forcomparison. We then tile the long-term leverage of the firms in brackets (Table I).

Next, we test if there are statistically significant differences between the populationof all listed firms and our two samples. Our null hypothesis is that there are nodifferences between these long-term leverage brackets. Thus, we frame our two-tailedhypotheses as follows:

QRFM1,2

88

H 0 : p ¼ p

H 1 : p – p

where p is population proportions and p is the sample proportions. The formula forx 2 is:

x 2 ¼Xk

i¼1

½Oi 2 Ei�2

Ei

where Oi is the observed number of cases falling in the ith category, Ei is the expectednumber of cases falling in the ith category and k is the number of categories.

In our case, the observed number is the sample percentage of the long-term leveragewhile the expected number is the respective population percentage. The long-term debtto equity ratio brackets for the population and for both samples are presented inTable I.

The results of the x 2 test are presented in Table II.Applying the test, the x 2 values for samples 1 and 2 are 5.562 and 0.488,

respectively. To conclude whether these values lead to a rejection of our H0, weexamine where they lie in a x 2 distribution. To do so, we first calculate the totaldegrees of freedom as follows: the total number of parameters in our model is 7, namelythe number of long-term debt to equity ratio brackets, from which we subtract 1,because the expected frequencies in each of these brackets are not independent; thuswe have 6 degrees of freedom. The critical value of the x 2 distribution for 6 degrees offreedom, assuming an a ¼ 0.05 level of significance, is 12.592. The calculated valuedoes not exceed the critical value, thus the H0 is not rejected. Hence, both samplesare representative of the population according to the capital structure criterion and theconclusions based on the simultaneous examination of these two different samples canbe considered as reliable.

Population Sample 1 Sample 2% Brackets % Brackets % Brackets

No long-term debt 41.09 136 44.76 47 41.18 35Up to 10% 26.28 87 20.98 24 24.71 2111-20% 7.25 24 9.79 10 7.06 621-30% 7.55 25 9.09 11 8.24 731-50% 6.04 20 7.69 7 5.88 551-100% 7.25 24 6.99 8 7.06 6More than 100% 4.53 15 0.70 1 5.88 5

100 331 100 107 100 85

Table I.Population and sample

percentage brackets

Sample 1 Sample 2

x 2 5.562 0.488Degrees of freedom 6 6Critical value (a ¼ 0.05) 12.592

Table II.x 2 test results

Testing thepecking order

theory

89

External vs internal financingIn this section, we briefly refer to the findings of Vasiliou et al. (2005) and we thenisolate the variable that is directly related to the pecking order theory. The data theyused came from the financial statements published by 143 firms listed on the ATHEXduring the period 1997-2001. These data are included in the database of the ATHEXmarket.

The authors used panel-data models combining the cross-sectional data withtime-series and estimated the following model for the Greek market:

DRi;t ¼ ai þ b1ASi;t þ b2SIZEi;t þ b3PROFITi;t þ b4DRi;t21 þ 1i;t

where: DRi,t ¼ the debt ratio of firm i at time t, ASi,t ¼ the asset structure of firm i attime t, SIZEi,t ¼ the size of firm i at time t, PROFITi,t ¼ the profitability of firm i attime t, DRi,t21 ¼ the debt ratio of firm i at time t 2 1 and 1i,t ¼ the error term.

The study considered the following three models to estimate the effect of eachindependent variable on the debt ratio: the total model, the fixed effects model and therandom effects model. One of the key results[2] that emerged from the study was that anegative relationship exists between profitability and debt ratios, leading to theconclusion that firms that are more profitable use less debt, and thus the pecking ordertheory seems to hold. In this paper, we further analyze this conclusion.

We extend the previous study’s database to December 2002 to match thequestionnaire period adopted here. The present study is concerned with analysing thespecific predictions of the pecking order theory, and so we isolate the PROFITi,t

variable and investigate the direct relationship between it and the debt ratio. Thefollowing regression model is studied, with the results presented in Table III:

DRi;t ¼ ai þ b1PROFITi;t þ 1i;t

The R 2 is 83 per cent and the F-statistic is high enough (3,133.471) so that the H0 thatthe factor has no effect on the dependent variable is rejected (Prob.F-statistic ¼ 0.000). We see that the statistically significant (at 99 per cent)PROFITi,t variable is negatively related to the debt ratio. This means that firms thatare profitable use their internal funds (retained earnings) to finance their operationsand investments and thus they borrow relatively less than firms with low profitability.

Variable Coefficient SE t-statistic Prob.

C 0.515598 0.000402 1,283.2 0.0000Profit 20.686659 0.003840 2178.8 0.0000Weighted statisticsR 2 0.830395 Mean dependent var. 7.966317Adjusted R 2 0.830130 SD dependent var. 7.444337SE of regression 3.068206 Sum squared resid. 6,024.888F-statistic 3,133.471 Durbin-Watson stat. 0.891027Prob. (F-statistic) 0.000000

Notes: Dependent variable: DR; Model: total; Method: GLS (cross-section weights); WhiteHeteroskedasticity-consistent SE and covariance; GLS, generalized least squares; Prob., probability;SD, standard deviation; SE, standard error

Table III.Regression of debt ratioson profitability

QRFM1,2

90

Thus, firms prefer internal financing from debt and this is an indication that peckingorder may exist.

New debt versus new equityThe previous section reported that Greek firms appear to prefer internal financing todebt. The question that arises next therefore relates to the relative preference for debtover equity when external fund raising is undertaken. Unfortunately, the data derivedfrom the financial statements cannot provide an answer to this question. Instead, webelieve that the issue lends itself particularly well to qualitative analysis, in this caseby directly seeking the views of Greek firms’ financial managers. We thereforegenerated a detailed questionnaire consisting of 24 questions relating to the issue offinancing choices.

Using questionnaires to test capital structure issues is a relatively new methodologyin corporate finance. Graham and Harvey (2001) were the first to provide an integratedanalysis for specific corporate finance issues (including capital structure) based on adetailed US-based questionnaire. Bancel and Mittoo (2004) and Brounen et al. (2006)replicate the study of Graham and Harvey (2001) for European firms and compare theirresults to those of firms in the USA. Vasiliou and Daskalakis (2009) apply the samemethodology using a similar questionnaire and compare their findings for the Greekmarket with those for the USA and Europe.

All listed firms in the ATHEX were asked to answer the questionnaire. Prior tosending, it was tested by a panel of academic experts, resulting in minor adjustmentswhere necessary. The survey period lasted from 1 October 2002 until 31 January 2003.Our main concern was to arrange appointments with the financial managers to fill inthe questionnaire during the appointment. In case the appointment could not bearranged (usually due to the work-load of the financial managers), the questionnairewas sent and then returned by e-mail, fax or mail.

Our sample consists of 89 firms, which represents 29.3 per cent of the population(with banks and investment firms excluded). This response rate appears to be a goodone, if we bear in mind the response rates of corresponding surveys in othercountries[3]. Table IV presents some sample characteristics, regarding the firms’ size,using the sales figure as a proxy, and the industry in which they operate.

Regarding the pecking order issue, there is a specific question in this questionnairethat asks the firms to rank nine sources of capital (1 ¼ first choice, 9 ¼ last choice)when they finance a new long-term investment project. The responses are summarisedin Table V.

Table V presents the average score for each source of financing and the number offirms that chose each source as the first, second or third selection. Regarding the averagescores, bearing in mind that 1 stands for the first choice and 9 for the last, the lower themean, the more preferable the financing source. In addition to the mean score, weincluded the three last columns of Table V to illustrate the hierarchical order inresponses, as this is the very essence of the pecking order theory. For the pecking ordertheory to hold, firms should denote retained earnings as their first choice, long-termbank loans (or new bond issues) as their second choice, with new stock issues cominglast.

Inspection of Table V reveals that retained earnings were ranked first as aninvestment funding source by the financial managers (mean ¼ 3.33). Specifically,

Testing thepecking order

theory

91

24 firms picked retained earnings as the first source of financing their investments, thehighest number that appears anywhere in the table. This evidence implies that firms ingeneral prefer internal financing to externally raised funding.

At first glance, the answers of the respondents regarding external financing seem tofavour the pecking order theory; on average, firms seem to prefer raising new debt thanissuing new equity. However, use of the mean scores in isolation to test for theexistence of the pecking order potentially leads to a logical error when drawinginferences from the findings. In particular, the mean scores also reflect the volatility ofthe managers’ answers and what is therefore required as evidence regarding a genuinepecking order is the hierarchy that each firm follows (rather than the average rankingof the different sources across all sample firms). If a firm does follow the pecking orderpattern of financing, then it should finance its investments first with internal funds,second with debt and third with new equity issues. Therefore, we need to test forstatistical differences between retained earnings and:

Survey sample (%)

Sales (million euro),25 40.9625-99 33.73100-499 20.48500-999 2.411,000-4,999 2.41.5,000 0.00IndustryRetail and wholesale 15.66Mining, construction 24.10Manufacturing 15.66Transportation, energy 3.61Communication, media 12.05Bank, finance, insurance 8.43Tech (software, biotech, etc.) 9.64Other 10.84

Notes: “Other” includes the following sectors: chemicals (3 firms), health care (3), change of activity(1), gaming (1), travel and leisure (1)

Table IV.Sample statistics

Mean First Second Third

Retained earnings 3.33 24 15 7Long-term bank loan 3.55 17 9 18New stock issue 3.70 16 11 13New bond issue 4.27 6 18 3New convertible bond issue 4.42 10 7 13Savings from depreciation expenses 5.07 8 9 8Short-term loan 5.21 3 11 6New preferred stock issue 5.62 2 3 9

Note: The ninth alternative was the category named “Other” which was not used by the respondents

Table V.Responses to the question“How would you classifythe following financingsources in order tofinance a new investmentproject?”

QRFM1,2

92

. new debt; and

. new equity issues.

The results of a x 2 test of these propositions are provided in Table VI; these suggestthat there is no statistically significant difference between the number of firms thathighlighted retained earnings as their preferred source of finance and the number thatindicated long-term debt or new stock issue as being their first choice.

Even if there was a statistical significant difference between retained earnings as a firstchoice and all other sources of funds, this would not necessarily mean that theconventional pecking order does exist, as it simply just denotes that retained earnings arepreferred over alternatives sources; the ordering of debt and equity is not determined.

Thus, if the pecking order does exist, then, by definition, it can exist only for these24 firms that chose retained earnings as a first choice. To test this hypothesis, weisolated these firms and investigated which of the remaining sources they chose astheir second and third alternatives. Looking at the results, as summarised in Table VII,it is evident that only one of the 24 firms selected long-term bank loans as their secondchoice, whereas alternative whereas six firms denoted that their second alternativewould be a new stock issue.

The overall conclusion that can be reached on the basis of the above evidence is thatthe pecking order theory does not seem to hold for the Greek firms. However, anotherimportant insight that the analysis suggests is that methodological weaknesses maylead to the drawing of inappropriate conclusions. These may arise because the peckingorder theory refers to a distinct hierarchy of the financing sources that has to becarefully considered by researchers. As noted above, Chirinko and Singha (2000)suggest that the empirical evidence in Shyam-Sunder and Myers (1999) may generatemisleading inferences when evaluating plausible patterns of external financing. Thus,researchers must be extremely careful when analysing and drawing conclusions aboutthe pecking order theory.

ConclusionsIn this paper, we have adopted two different methodologies to test the pecking ordertheory. The most important conclusion that can be drawn from the analysis is that

Panel A Panel BObserved N Expected N Residual Observed N Expected N Residual

Retained earnings as afirst choice 24 20.5 3.5 24 20 4.0Long-term loan as afirst choice 17 20.5 23.5 16 20 24.0Total 41 40x 2 1.195a 1.600a

Degrees of freedom 1 1Probability 0.274 0.206

Notes: Panel A – retained earnings as a first choice vs long-term bank loan as a first choice; Panel B –retained earnings as a first choice vs new stock issue as a first choice; a0 cells (0 per cent) have expectedfrequencies less than 5

Table VI.x 2 test results

Testing thepecking order

theory

93

Lon

g-t

erm

ban

klo

anN

ewst

ock

issu

eH

iera

rch

yF

req

uen

cy%

Val

id%

Cu

mu

lati

ve

%F

req

uen

cy%

Val

id%

Cu

mu

lati

ve

%

21

4.17

4.76

4.76

625

.00

26.0

926

.09

36

25.0

028

.57

33.3

33

12.5

013

.04

39.1

34

520

.83

23.8

157

.14

520

.83

21.7

460

.87

54

16.6

719

.05

76.1

94

16.6

717

.39

78.2

66

14.

174.

7680

.95

416

.67

17.3

995

.65

74

16.6

719

.05

100.

001

4.17

4.35

100.

00V

alid

2187

.50

100.

0023

95.8

310

0.00

Mis

sin

g3

12.5

01

4.17

Tot

al24

100.

0024

100.

00

Table VII.Hierarchy of long termbank loan and new stockissue for those firms thatchose retained earningsas their primary source offinancing

QRFM1,2

94

researchers should be careful when drawing conclusions regarding the pecking orderpattern of financing, as different methodologies may lead to different conclusions. Twodifferent sources of information were employed to reach this standpoint. The first wasthe data used in an earlier quantitative paper by Vasiliou et al. (2005), derived from thefinancial statements of firms listed on the ATHEX during the period 1997-2001, whichwe extended to December 2002. The second set of data consists of the answers to adetailed questionnaire that was sent to all Greek firms listed on the ATHEX. Thequestionnaire was filled in and sent back during the period of 1 October 2002 until 31January 2003.

We have argued that the conclusion often drawn by researchers in this area,whereby a negative relationship between profitability and leverage is used as supportfor the pecking order pattern of financing choices, is questionable. The methodologyfollowed is of crucial importance in such analysis; the fact that the pecking order isactually a three-level hierarchy means that research on the topic must be carefullyplanned. Further research should focus on investigating the reasons that underlieactual firm financing, but in the context of the evidence presented here that “average”results can mask the precise ordering of alternative financing sources in the corporatedecision-making process.

Notes

1. Data are drawn from the ATHEX database, which contains the published financialstatements for all listed firms.

2. The random effects model did not generate any significant results. The total model and thefixed effecsts model provided similar results that led to the conclusions discussed in the text.

3. Scott and Johnson (1982) report a response rate of 21.2 per cent, Pinegar and Wilbricht (1989)a rate of 35.2 per cent, Graham and Harvey (2001) a rate of 9 per cent, Bancel and Mittoo(2004) a rate of 12 per cent and Brounen et al. (2004, 2006) a rate of 5 per cent for similarsurveys.

References

Bancel, F. and Mittoo, U. (2004), “Cross-country determinants of capital structure choice: a surveyof European firms”, Financial Management, Vol. 33 No. 4, pp. 103-33.

Brounen, D., de Jong, A. and Koedijk, K. (2004), “Corporate finance in Europe: confronting theorywith practice”, Financial Management, Vol. 33 No. 4, pp. 71-101.

Brounen, D., de Jong, A. and Koedijk, K. (2006), “Capital structure policies in Europe: surveyevidence”, Journal of Banking & Finance, Vol. 30, pp. 1409-42.

Chirinko, R. and Singha, A. (2000), “Testing static trade off against pecking order models ofcapital structure: a critical comment”, Journal of Financial Economics, Vol. 58, pp. 412-25.

DeMiguel, A. and Pindado, J. (2000), “Determinants of capital structure: new evidence fromSpanish panel data”, Journal of Corporate Finance, Vol. 7, pp. 77-99.

Donaldson, G. (1961), Corporate Debt Capacity: A Study of Corporate Debt Policy andDetermination of Corporate Debt Capacity, Harvard Graduate School of Management,Boston, MA.

Emery, D. and Finnerty, J. (1997), Corporate Financial Management, Prentice-Hall, EnglewoodCliffs, NJ.

Testing thepecking order

theory

95

Fama, E. and French, K. (2005), “Financing decisions: who issues stocks?”, Journal of FinancialEconomics, Vol. 76, pp. 549-82.

Frank, M. and Goyal, V. (2003), “Testing the pecking order theory of capital structure”, Journal ofFinancial Economics, Vol. 67, pp. 217-48.

Friend, I. and Lang, H.P. (1988), “An empirical test of the impact of managerial self-interest oncorporate capital structure”, Journal of Finance, Vol. 43, pp. 271-81.

Galpin, N. (2004), “Can the pecking order explain the costs of raising capital?”, Paper No. 3404,European Fund Administration (EFA), 2004 Maastricht Meetings, Luxembourg.

Graham, R.J. and Harvey, C.R. (2001), “The theory and practice of corporate finance: evidencefrom the field”, Journal of Financial Economics, Vol. 60, pp. 187-243.

Kester, W.C. (1986), “Capital and ownership structure: a comparison of United States andJapanese manufacturing corporations”, Financial Management, Vol. 15, pp. 5-16.

Leary, M. and Roberts, M. (2008), “The pecking order, debt capacity, and informationasymmetry”, working paper, Social Science Research Network (SSRN), available at:http://ssrn.com/abstract=555805 (accessed August 21, 2008).

Lee, I., Lochhead, S., Ritter, J. and Zhao, Q. (1996), “The cost of raising capital”, The Journal ofFinancial Research, Vol. 19 No. 1, pp. 59-74.

Lemmon, M. and Zender, J. (2002), “Debt capacity and tests of capital structure theories”,working paper, AFA 2003 Meetings, Washington, DC, available at:http://ssrn.com/abstract=334780 (accessed September 10, 2002).

Myers, S.C. (1984), “The capital structure puzzle”, Journal of Finance, Vol. 39, pp. 575-92.

Myers, S.C. and Majluf, N.S. (1984), “Corporate financing and investment decisions when firmshave information that investors do not have”, Journal of Financial Economics, Vol. 13,pp. 187-221.

Pinegar, M. and Wilbricht, L.C. (1989), “What managers think of capital structure theory:a survey”, Financial Management, Vol. 18, pp. 82-91.

Rajan, R.G. and Zingales, L. (1995), “What do we know about capital structure? Some evidencefrom international data”, Journal of Finance, Vol. 50, pp. 1421-60.

Scott, D. and Johnson, D. (1982), “Financing policies and practices in large corporations”,Financial Management, Summer, pp. 51-9.

Shyam-Sunder, L. and Myers, S.C. (1999), “Testing static tradeoff against pecking order modelsof capital structure”, Journal of Financial Economics, Vol. 51, pp. 219-44.

Vasiliou, D. and Daskalakis, N. (2009), “Institutional characteristics and capital structure:a cross-national comparison”, Global Finance Journal, Vol. 19 No. 3, pp. 286-306.

Vasiliou, D., Eriotis, N. and Daskalakis, N. (2005), “The determinants of capital structure:evidence from the Greek market”, Essays in Honour of Professor Stylianos A. Sarantides,University of Piraeus, Piraeus, pp. 145-59.

Wald, J. (1999), “How firm characteristics affect capital structure: an international comparison”,The Journal of Financial Research, Vol. 22 No. 2, pp. 161-87.

Corresponding authorNikolaos Daskalakis can be contacted at: ndaskal@aueb.gr

QRFM1,2

96

To purchase reprints of this article please e-mail: reprints@emeraldinsight.comOr visit our web site for further details: www.emeraldinsight.com/reprints