Testing Trade-Off and Pecking Order Models Under Different Institutional Environments

28 Pages Posted: 14 May 2009 Last revised: 17 Feb 2014

See all articles by Joseph B. Farhat

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance

Benjamin A. Abugri

Southern Connecticut State University - Department of Economics and Finance

Date Written: May 14, 2009

Abstract

In this paper, we examine the differences in information asymmetry and financing patterns and a generalized version of the trade-off theory across countries with different institutional environments. We find that firms in Civil law countries have higher information asymmetry, rely more on internally generated funds, and use more short-term debt to finance their financing deficit, relative to those in Common law countries. In both Civil law and Common law countries, factors suggested by the trade-off theory explain the financing deficit coefficient in the generalized version of the trade-off model. Overall, the generalized version of the trade-off theory provides a better explanation for the changes in capital structure relative to the pecking order theory, even in countries with higher information asymmetry.

Keywords: International capital structure, pecking order theory, trade-off theory

JEL Classification: G30, G32, G34

Suggested Citation

Farhat, Joseph and Cotei, Carmen and Abugri, Benjamin A., Testing Trade-Off and Pecking Order Models Under Different Institutional Environments (May 14, 2009). Available at SSRN: https://ssrn.com/abstract=1404596 or http://dx.doi.org/10.2139/ssrn.1404596

Joseph Farhat (Contact Author)

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance ( email )

United States

Benjamin A. Abugri

Southern Connecticut State University - Department of Economics and Finance ( email )

New Haven, CT 06515
United States

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