Testing Trade-Off and Pecking Order Models Under Different Institutional Environments
28 Pages Posted: 14 May 2009 Last revised: 17 Feb 2014
Date Written: May 14, 2009
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: Suggested Citation