A Direct Test of the Pecking Order Hypothesis in an Australian Context

Working Paper ISBN NO. 0-7298-0251-5

Posted: 24 Mar 1997

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

M.R. Clissold

Edith Cowan University

Date Written: March 1996

Abstract

Proponents of the existence of an optimum capital structure suggest that companies continue to employ debt until the marginal benefit of leverage equals its marginal cost. In contrast, advocates of the pecking order theory contend that observed capital structures reflect the relationship between internally available funds and investment requirements. This study applies the methodology originally advanced by Shyam-Sunder (1988) to a sample of forty-one Australian companies. Extreme versions of target adjustment and pecking order modes are formulated, and their ability to explain observed capital structure over 1978-1993 is examined. Additional tests are undertaken to determine the predictive ability of these models on a holdout sample obtained by partitioning the sample period in two unequal lengths. The results suggest that the pecking order theory explains capital structure change more accurately than simple target adjustment formulations.

JEL Classification: G32, G31

Suggested Citation

Allen, David Edmund and Clissold, M.R., A Direct Test of the Pecking Order Hypothesis in an Australian Context (March 1996). Working Paper ISBN NO. 0-7298-0251-5. Available at SSRN: https://ssrn.com/abstract=8209

David Edmund Allen (Contact Author)

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

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

M.R. Clissold

Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

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