The Pecking Order Theory of Capital Structure: Where Do We Stand?

42 Pages Posted: 14 Mar 2020 Last revised: 23 Mar 2020

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Tao Shen

Tsinghua University

Date Written: February 19, 2020

Abstract

The pecking order theory of corporate capital structure states that firms finance deficits with internal resources when possible. If internal funds are inadequate, firms obtain external debt. External equity is the last resort. Some financing patterns in the data are consistent with pecking order: firms with moderate deficits favor debt issues; firms with very high deficits rely much more on equity than debt. Others are not: many equity issuing firms do not seem to have entirely used up the debt capacity; some firms with a surplus do issue equity. The theory suggests a sharp discontinuity of financing methods between surplus firms and deficit firms and another at the debt capacity. The literature provides little support for the predicted threshold effects.

Keywords: pecking order, net equity issues, net debt issues, financing deficit

JEL Classification: G32

Suggested Citation

Frank, Murray Z. and Goyal, Vidhan K. and Shen, Tao, The Pecking Order Theory of Capital Structure: Where Do We Stand? (February 19, 2020). Available at SSRN: https://ssrn.com/abstract=3540610 or http://dx.doi.org/10.2139/ssrn.3540610

Murray Z. Frank

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

Tao Shen (Contact Author)

Tsinghua University ( email )

Department of Finance
School of Economics and Management
China

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