Testing the Pecking Order Theory: The Importance of Methodology

Qualitative Research in Financial Markets, Vol. 1, No. 2, pp. 85-96, 2009

12 Pages Posted: 26 Sep 2010

See all articles by Dimitrios Vasiliou

Dimitrios Vasiliou

National and Kapodistrian University of Athens

Nikolaos Eriotis

National and Kapodistrian University of Athens

Nikolaos Daskalakis

Panteion University

Date Written: 2009

Abstract

The purpose of this paper is to show that different methodologies may lead to different implications about the validity of the pecking order theory. Using data from Greek firms as a starting-point, the paper first investigates whether they follow the financing pattern implied by the pecking order theory and then illustrates that conclusions concerning the pecking order should be carefully shaped by researchers, as the methodology used can be misleading. Two different information sources are used; the first is data derived from the financial statements of the Greek firms listed in the Athens Exchange, while the second comprises the answers to a detailed questionnaire. It is shown that a negative relationship between leverage and profitability does not necessarily mean that the pecking order financing hierarchy holds. Analysis should not rely solely on the mean-oriented regression quantitative analysis to test the pecking order theory, as it refers to a distinct hierarchy. Further research should focus on investigating the reasons that underlie actual firm financing. The fact that the pecking order is actually a hierarchy makes research in this field more complex. Analysts should consider this special feature of the pecking order approach when analyzing the existence of the pecking order financing pattern. The methodology followed is of crucial importance in the analysis of the existence of the pecking order financing pattern.

Keywords: Capital structure, Research methods, Financing, Greece

JEL Classification: G3, G32

Suggested Citation

Vasiliou, Dimitrios and Eriotis, Nikolaos and Daskalakis, Nikolaos, Testing the Pecking Order Theory: The Importance of Methodology (2009). Qualitative Research in Financial Markets, Vol. 1, No. 2, pp. 85-96, 2009, Available at SSRN: https://ssrn.com/abstract=1682042

Dimitrios Vasiliou

National and Kapodistrian University of Athens ( email )

Athenes
Greece
0030 210 3689486 (Phone)

Nikolaos Eriotis

National and Kapodistrian University of Athens ( email )

5 Stadiou Strt
Athens, 12131
Greece

Nikolaos Daskalakis (Contact Author)

Panteion University ( email )

136 Sygrou
Athens
Greece
GR17671 (Fax)

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