Download This PaperModels and Tests for the Pecking Order Hypothesis
8 Pages Posted: 5 Mar 2020 Last revised: 10 Apr 2020
Date Written: February 9, 2020
Abstract
The hypothesis that when firms obtain financing, they prefer internal sources to external sources is known as the pecking order hypothesis. We model firms' financing activities implied by the pecking order hypothesis by a sequential logit model. Then, we propose to test the pecking order hypothesis by testing the null of sequential logit models against the alternative of nested logit models. Applying the proposed methods, we find that the pecking order hypothesis is rejected for Japanese companies. This implies that their financing activities are viewed as a simultaneous comparison -- choice behavior, namely, they compare all available alternative financing methods simultaneously.
Keywords: Pecking Order Hypothesis, Sequential Logit Model, Nested Logit Model
JEL Classification: C01, C25, C52, G32.
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