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Trade-off Theory vs Pecking Order Theory Revisited

Author

Listed:
  • Priyanka Singh

    (Priyanka Singh, Fellow, Indian Institute of Management Ahmedabad, Ahmedabad 380015, Gujarat, India)

  • Brajesh Kumar

    (Brajesh Kumar, Fellow, IIM Ahmedabad, and Assistant Professor, Jindal Global Business School, O.P. Jindal Global University, Sonipat-Narela Road, Near Jagdishpur Village, Sonipat, Haryana 131001, NCR of Delhi, India)

Abstract

This article empirically tests the two competing theories of capital structure: Trade-off theory against Pecking Order theory using the time series hypothesis. This study is performed for an emerging market context taking the case of Indian firms with a sample from 10 industries for the period 1990 to 2007. Our results support the evidence of trade-off theory in the Indian firms (contrary to the results found by Farhat, Cotei and Abugri 2006). The result is consistent for the overall sample as well as for different industries separately. JEL Classification : G32, C23, C33

Suggested Citation

  • Priyanka Singh & Brajesh Kumar, 2012. "Trade-off Theory vs Pecking Order Theory Revisited," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 11(2), pages 145-159, August.
    • Handle: RePEc:sae:emffin:v:11:y:2012:i:2:p:145-159
    DOI: 10.1177/0972652712454514
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    References listed on IDEAS

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    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    4. Chirinko, Robert S. & Singha, Anuja R., 2000. "Testing static tradeoff against pecking order models of capital structure: a critical comment," Journal of Financial Economics, Elsevier, vol. 58(3), pages 417-425, December.
    5. Sudipto Sarkar & Fernando Zapatero, 2003. "The Trade-off Model with Mean Reverting Earnings: Theory and Empirical Tests," Economic Journal, Royal Economic Society, vol. 113(490), pages 834-860, October.
    6. Myers, Stewart C., 2003. "Financing of corporations," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 4, pages 215-253, Elsevier.
    7. John K. Wald, 1999. "How Firm Characteristics Affect Capital Structure: An International Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 161-187, June.
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    Cited by:

    1. CHIRILA, Viorica & CHIRILA, Ciprian, 2014. "Testing Stock Markets’ Integration From Central And Eastern European Countries Within Euro Zone," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 18(3), pages 76-88.

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    More about this item

    Keywords

    Trade-off theory; pecking order theory; capital structure; emerging market;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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