The Impact of Financing Surpluses and Large Financing Deficits on Tests of the Pecking Order Theory
Financial Management, Forthcoming
44 Pages Posted: 30 Jan 2007 Last revised: 11 Aug 2009
Date Written: January 8, 2009
This paper extends the basic pecking order model of Shyam-Sunder and Myers (1999) by separating the effects of financing surpluses, normal deficits, and large deficits. Using a panel of U.S. firms over 1971-2005, we find that the estimated pecking order coefficient is highest for surpluses (0.90), lower for normal deficits (0.74), and lowest when firms have large financing deficits (0.09). These findings shed light on two empirical puzzles: 1) small firms, although having the highest potential for asymmetric information, do not behave according to the pecking order theory, and 2) the pecking order theory has lost explanatory power over time. We provide a solution to these puzzles by demonstrating that the frequency of large deficits is higher in smaller firms and increasing over time. We argue that our results are consistent with the debt capacity in the pecking order model.
Keywords: Capital structure, pecking order theory, financing deficit
JEL Classification: G32
Suggested Citation: Suggested Citation