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The capital structure decisions of firms: is there a pecking order?

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  • Andrew Benito

    (Banco de España)

Abstract

This paper considers the "trade-off" and "pecking order" theories, the two most influential approaches to understanding firms' capital structure decisions. The paper adopts two approaches to examining capital structures using firm-level panel data for firms in both Spain and the United Kingdom. First, debt ratios are examined and found to be decreasing in cash flow or profitability and increasing in the investment of the firm in both countries. Second, aspects of the two different financial systems are examined. In Spain, a bank-based financial system, there is some modest evidence that such effects are weaker for larger firms and for firms with equity held by financial institutions. In the United Kingdom, a market-based financial system, the propensity to issue additional debt is compared to that for issuing new equity and found to be more sensitive to financial characteristics of the firm. The results are consistent with the pecking order approach and generally inconsistent with the tradeoff approach suggesting behaviour consistent with the existence of a hierarchy of finance faced by firms in Spain and the United Kingdom.

Suggested Citation

  • Andrew Benito, 2003. "The capital structure decisions of firms: is there a pecking order?," Working Papers 0310, Banco de España.
    • Handle: RePEc:bde:wpaper:0310
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    References listed on IDEAS

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    8. Mohamed Soufeljil & Asma Sghaier & Zouhayer Mighri & Hanène Kheireddine, 2017. "The financial structure of the Tunisian listed businesses: an application on panel data," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 7(1), pages 1-25, December.
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    10. Harshana Kasseeah, 2012. "Financial Constraints and Leverage Decisions in Small and Medium-Sized Firms," Journal of Economics and Behavioral Studies, AMH International, vol. 4(1), pages 55-65.
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    14. Christoph Börner & Dietmar Grichnik & Frank Reize, 2010. "Finanzierungsentscheidungen mittelständischer Unternehmer — Einflussfaktoren der Fremdfinanzierung deutscher KMU," Schmalenbach Journal of Business Research, Springer, vol. 62(2), pages 227-275, March.
    15. Gebauer, Stefan & Setzer, Ralph & Westphal, Andreas, 2017. "Corporate debt and investment: a firm analysis for stressed euro area countries," Working Paper Series 2101, European Central Bank.
    16. José Manuel Marqués & Fernando Nieto & Ana del Río, 2005. "Una aproximación a los determinantes de la financiación de las sociedades no financieras en España," Working Papers 0535, Banco de España.
    17. Ojah Patrick, Ogebe & Joseph Orinya, Ogebe & Kemi, Alewi, 2013. "The Impact of Capital Structure on Firms’ Performance in Nigeria," MPRA Paper 45986, University Library of Munich, Germany, revised 04 Apr 2013.
    18. Elmina Homapour & Larry Su & Fabio Caraffini & Francisco Chiclana, 2022. "Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms," Mathematics, MDPI, vol. 10(7), pages 1-28, March.
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    More about this item

    Keywords

    capital structure; pecking order;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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