Is There a Pecking Order? Evidence from a Panel of IPO Firms
Posted: 20 Dec 1998
Date Written: June 1994
Myers (1984) and Myers and Majluf (1984) posit that asymmetric information problems cause firms to follow a pecking order when choosing the source of funds for new investment. Internal funds are preferred to external funds, and if external funds are obtained, safer instruments will be offered before risky ones. The empirical evidence to date has produced indirect evidence that mostly support this theory, but with many predictions that overlap those of a static tradeoff model, conclusions are difficult to draw. In this paper we examine the decision to obtain external financing, and when obtained, the type of financing, for a group of firms that completed initial public offerings in 1983. We investigate the security offerings of these firms over the decade between 1984 and 1993 using a multinomial logit model to determine if firms follow the pecking order. The array of financing choices made by these firms is rich -- we observe straight and convertible bond offerings, private debt, and common equity offerings, as well as firms that never access any capital markets after their IPOs. In contrast, other studies typically examine older, established firms for which the pecking order collapses to a choice of internal funds or debt. Moreover, we expect that asymmetric information problems will be greater among the IPOs, and will likely decline as the firms age. We conclude from our investigation that firms do not obtain external funds based on their cash flow (Myers and Shyam-Sunder's (1992) cash deficit). Allowing for the possibility that weak firms with cash deficits are unable to tap the capital markets does not affect our results. Among firms that obtain funds externally, we have determined that firms do not follow the pecking order. The least risky firms are the most likely to issue public bonds, as predicited by the pecking order, but we find that firms that issue equity are not riskier than firms that obtain bank debt.
JEL Classification: G32
Suggested Citation: Suggested Citation