Capital Structure and Financing Decisions: New Test for Pecking Order Theory

Abstract

The pecking order theory, or preferences in terms of sources of finance, is an important proposal to explain the financing decisions, and firm's capital structure. Recent publications had criticized this theory, alleging that it would not be a valid explanation for capital structure decisions, and accusing of methodological flaws in previous proofs. The aim of this article is to test the pecking order propositions, through a new methodology, applied to a sample of companies listed at São Paulo stock exchange, in the period 1998-2005. When the complete sample is used, it seems that we cannot reject the pecking order. The adherence is different by sub period, being smaller between 2002 and 2005. But, when the companies are grouped according to size, profitability and growth, it is noticed that the support to the theory, in general, disappears as the companies are more lucrative and of larger size. These results contradict previous studies in Brazil on the pecking order theory and they are in line with recent literature statements about the methodological flaws and the validity of the pecking order as theory able to explain the firm's capital structure.

Keywords: Capital structure, Financing Decisions,Pecking Order, Deficit

JEL Classification: J32, J34, C23, M21