The Pecking Order and Financing Decisions: Evidence from Changes to Financial Reporting Regulation
41 Pages Posted: 17 Sep 2012 Last revised: 4 Jan 2018
Date Written: December 2017
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: Suggested Citation