Testing the Pecking Order Theory of Capital Structure in Brazilian Firms

Abstract

The paper tests if the theory known as Pecking Order Theory provides empirical explanation for the capital structure of Brazilian firms. According to this theory, the capital structures would result from a hierarchy of financial decisions where internally generated resources would have first priority, followed by debt issues and, as last resort only, by equity issues. In its strong form, the Pecking Order Theory sustains that equity issues would never occur, whereas in its weak form, limited amounts of issues are acceptable. The methodology adopted in this empirical study involves cross-section regressions and the testing of hypotheses stemming from the underlying theory in its strong and weak forms. The upshot leads to the conclusion that the tested theory, in its weak form, is applicable to Brazilian firms, but the same does not happen with its strong form. The results also show that the goodness of fit of the Brazilian regressions are significantly better than those reported for American firms and that Brazilian firms seem to be closer to the Pecking Order's strong form than the American ones. The sample involves 132 publicly listed firms and the accounting data refer to 2001.

Keywords: capital structure, pecking order, empirical study, Brazilian firms

JEL Classification: C10, C12, C20, C21, G30, G31, G32