The Pecking Order and Financing Decisions: Evidence from Changes to Financial Reporting Regulation

41 Pages Posted: 17 Sep 2012 Last revised: 20 May 2018

See all articles by Patricia L. Naranjo

Patricia L. Naranjo

Rice University

Daniel Saavedra

UCLA Anderson School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Date Written: May 18, 2018

Abstract

We use the staggered introduction of a major financial reporting regulation worldwide to study whether firms make financing decisions consistent with the pecking order theory. Exploiting within country-year variation in firms’ financing frictions, we document that financially constrained firms increase their issuance of external financing (and ultimately increase investment) after the new regime. Further, firms make different leverage decisions (debt vs. equity) around the new regulation depending on their ex-ante debt capacity, which allows them to adjust their capital structure. Our findings highlight the importance of the pecking order theory in explaining financing as well as investment policies.

Keywords: Financial Reporting Regulation, Financing Decisions, Information Asymmetry, Capital Structure, International Accounting, IAS, IFRS

JEL Classification: G15, G30, G32, M41

Suggested Citation

Naranjo, Patricia L. and Saavedra, Daniel and Verdi, Rodrigo S., The Pecking Order and Financing Decisions: Evidence from Changes to Financial Reporting Regulation (May 18, 2018). Available at SSRN: https://ssrn.com/abstract=2147838 or http://dx.doi.org/10.2139/ssrn.2147838

Patricia L. Naranjo

Rice University ( email )

6100 South Main Street
McNair Hall - Room 343
Houston, TX 77005-1892
United States
7133485386 (Phone)

Daniel Saavedra

UCLA Anderson School of Management ( email )

Los Angeles, CA
United States

Rodrigo S. Verdi (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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