Testing the trade off and pecking order models of capital structure
Part of : Αρχείον οικονομικής ιστορίας ; Vol.XXVI, No.2, 2014, pages 79-98
Issue:
Pages:
79-98
Abstract:
The current research work attempts to review the capital structure literature based mostly on the two prominent theories, the trade-off and pecking order, and attempts to test which of these two theories better explain the issuance of debt. Moreover, the current paper focuses on how the Trade-off, Pecking Order and Market Timing theories can explain the unsolved capital structure puzzle. Following, is a deliberation about which listed factors can most influence the degree of leverage according to empirical evidences. Next, an empirical analysis takes place based on Shyam-Sunder and Myers’s (1999) models in order to identify which of Trade-Off and PeckingOrder models can better explain debt issuance decisions. A balanced data panel has been created, including all the variables that both models need, in order to run an OLS regression. Thedata used in this empirical analysis contain a sample of 45 companies traded on the London Stock Exchange. The period covered runs from 1995 to 2012; different approaches have beenconducted based on these two models and the results are that the null hypothesis for both models has been rejected. The results show that, following the pecking order theory, the deficit fund does not have the explanatory power neither for the debt issue, nor the target level of debt. On the other hand, the target-adjustment model seems to better explain the results according to R2.
Subject:
Subject (LC):
Keywords:
Capital Structure theories
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