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

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: January 8, 2009

Abstract

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

de Jong, Abe and Verbeek, Marno and Verwijmeren, Patrick, The Impact of Financing Surpluses and Large Financing Deficits on Tests of the Pecking Order Theory (January 8, 2009). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=959995

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Patrick Verwijmeren (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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