Tests of the Pecking Order Theory and the Firm Life Cycle

36 Pages Posted: 21 Feb 2009 Last revised: 28 Apr 2009

See all articles by Laarni T. Bulan

Laarni T. Bulan

Cornerstone Research

Zhipeng Yan

New Jersey Institute of Technology

Date Written: January 6, 2009


We examine the central prediction of the pecking order theory of financing among firms in two distinct life cycle stages, namely growth and maturity. In general, we find that firms in both stages follow the pecking order. More specifically, we find that within a life cycle stage and after sufficiently controlling for debt capacity constraints across several dimensions, firms with high adverse selection costs follow the pecking order more closely, as the theory predicts. We further show that certain determinants of debt capacity are specific to each life cycle stage, and cannot simply be generalized across a broad sample of firms. Our results highlight how intertwined firm financing decisions are with its life cycle and that one size does not fit all with regards to firm financial policy.

Keywords: Life Cycle, Pecking Order, Financing, Capital Structure

JEL Classification: G32

Suggested Citation

Bulan, Laarni Tobia and Yan, Zhipeng, Tests of the Pecking Order Theory and the Firm Life Cycle (January 6, 2009). Available at SSRN: https://ssrn.com/abstract=1347430 or http://dx.doi.org/10.2139/ssrn.1347430

Laarni Tobia Bulan (Contact Author)

Cornerstone Research ( email )

Boston, MA
United States

Zhipeng Yan

New Jersey Institute of Technology ( email )

United States

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