IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v3y1994i2p141-154.html
   My bibliography  Save this article

Sustainable Growth And Choice Of Financing: A Test Of The Pecking Order Hypothesis

Author

Listed:
  • Daniel P. Klein
  • Brian Belt

Abstract

This paper studies the impact of sales growth above a sustainable level on the financing choices of the firm. Myers [1984] indicates that firms typically employ a pecking order of financing choices, using internal equity before the issuance of external debt, followed by the issuance of external equity. Contingency table analysis performed in this paper provides indirect evidence that the faster firms are growing, the more they use up available internal financing and, thus, must raise funds externally. In addition, logit analysis shows that firms with lower asymmetric information tend to raise the majority of their funds externally, with debt being the primary choice. Together, both sets of results provide indirect support for Myers' pecking order theory since it appears that firms use available internal financing, then debt, then new equity to finance growth.

Suggested Citation

  • Daniel P. Klein & Brian Belt, 1994. "Sustainable Growth And Choice Of Financing: A Test Of The Pecking Order Hypothesis," Review of Financial Economics, John Wiley & Sons, vol. 3(2), pages 141-154, March.
    • Handle: RePEc:wly:revfec:v:3:y:1994:i:2:p:141-154
    DOI: 10.1002/j.1873-5924.1994.tb00578.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/j.1873-5924.1994.tb00578.x
    Download Restriction: no
    File URL: https://libkey.io/10.1002/j.1873-5924.1994.tb00578.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. E. Tylor Claggett, 1991. "Capital Structure: Convergent And Pecking Order Evidence," Review of Financial Economics, John Wiley & Sons, vol. 1(1), pages 35-48, September.
    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. 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.
    4. Brennan, Michael J & Kraus, Alan, 1987. "Efficient Financing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 42(5), pages 1225-1243, December.
    5. Narayanan, M. P., 1988. "Debt versus Equity under Asymmetric Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(1), pages 39-51, March.
    6. Gup, Benton E, 1980. "The Financial Consequences of Corporate Growth," Journal of Finance, American Finance Association, vol. 35(5), pages 1257-1265, December.
    7. Clarke, Richard N, 1989. "SICs as Delineators of Economic Markets," The Journal of Business, University of Chicago Press, vol. 62(1), pages 17-31, January.
    8. Amihud, Yakov & Lev, Baruch & Travlos, Nickolaos G, 1990. "Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions," Journal of Finance, American Finance Association, vol. 45(2), pages 603-616, June.
    9. Heinkel, Robert & Zechner, Josef, 1990. "The Role of Debt and Perferred Stock as a Solution to Adverse Investment Incentives," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(1), pages 1-24, March.
    10. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    11. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    12. Pruitt, Stephen W & Gitman, Lawrence J, 1991. "The Interactions between the Investment, Financing, and Dividend Decisions of Major U.S. Firms," The Financial Review, Eastern Finance Association, vol. 26(3), pages 409-430, August.
    13. Gupta, Manak C, 1969. "The Effect of Size, Growth, and Industry on the Financial Structure of Manufacturing Companies," Journal of Finance, American Finance Association, vol. 24(3), pages 517-529, June.
    14. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    15. Dierkens, Nathalie, 1991. "Information Asymmetry and Equity Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 181-199, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2005. "Company Financial Structure: A Survey and Implications for Developing Economies," Chapters, in: Christopher J. Green & Colin Kirkpatrick & Victor Murinde (ed.), Finance and Development, chapter 12, Edward Elgar Publishing.
    2. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2001. "Company Financing, Captial Structure, and Ownership: A Survey, and Implications for Developing Economies," SUERF Studies, SUERF - The European Money and Finance Forum, number 12 edited by Morten Balling, May.
    3. Antonczyk, Ron Christian & Salzmann, Astrid Juliane, 2014. "Overconfidence and optimism: The effect of national culture on capital structure," Research in International Business and Finance, Elsevier, vol. 31(C), pages 132-151.
    4. Rizov, Marian, 2008. "Corporate capital structure and how soft budget constraints may affect it," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 22(4), pages 648-684.
    5. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
    6. Fulghieri, Paolo & Lukin, Dmitry, 2001. "Information production, dilution costs, and optimal security design," Journal of Financial Economics, Elsevier, vol. 61(1), pages 3-42, July.
    7. Gregoire, Philippe & Huang, Hui, 2008. "Informed trading, noise trading and the cost of equity," International Review of Economics & Finance, Elsevier, vol. 17(1), pages 13-32.
    8. Linda C. Hittle & Kamal Haddad & Lawrence J. Gitman, 1992. "Over‐The‐Counter Firms, Asymmetric Information, And Financing Preferences," Review of Financial Economics, John Wiley & Sons, vol. 2(1), pages 81-92, September.
    9. Dimiter Rafailov, 2003. "Determinants of the capital structure of the Bulgarian firms," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 47-65.
    10. Demirguc-Kunt, Asli, 1992. "Developing country capital structures and emerging stock markets," Policy Research Working Paper Series 933, The World Bank.
    11. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
    12. Hanifa, Mohamed Hisham & Masih, Mansur & Bacha, Obiyathulla, 2014. "Testing Sukuk And Conventional Bond Offers Based On Corporate Financing Theories Using Partial Adjustment Models: Evidence From Malaysian Listed Firms," MPRA Paper 56953, University Library of Munich, Germany.
    13. Bernhardt, Dan & Koufopoulos, Kostas & Trigilia, Giulio, 2022. "Separating equilibria, underpricing and security design," Journal of Financial Economics, Elsevier, vol. 145(3), pages 788-801.
    14. Miglo, Anton, 2007. "Debt-equity choice as a signal of earnings profile over time," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(1), pages 69-93, March.
    15. Lee, Chi-Chuan & Lee, Chien-Chiang & Xiao, Shunyi, 2021. "Policy-related risk and corporate financing behavior: Evidence from China’s listed companies," Economic Modelling, Elsevier, vol. 94(C), pages 539-547.
    16. Isil Erol & Dogan Tirtiroglu, 2011. "Concentrated Ownership, No Dividend Payout Requirement and Capital Structure of REITs: Evidence from Turkey," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 174-204, July.
    17. Mohamed, Hisham Hanifa & Masih, Mansur & Bacha, Obiyathulla I., 2015. "Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 233-252.
    18. Maria K. Markopoulou & Demetrios L. Papadopoulos, 2009. "An empirical investigation on the capital structure signalling theory of companies listed in the Greek Stock Exchange," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(3), pages 217-238.
    19. Pravish Kumar Nunkoo & Agyenim Boateng, 2010. "The empirical determinants of target capital structure and adjustment to long-run target: evidence from Canadian firms," Applied Economics Letters, Taylor & Francis Journals, vol. 17(10), pages 983-990.
    20. Pindado, Julio & Requejo, Ignacio & Rivera, Juan C., 2017. "Economic forecast and corporate leverage choices: The role of the institutional environment," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 121-144.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:3:y:1994:i:2:p:141-154. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.