Does Firms’ Pecking Order Vary during Large Deficits and Surpluses? An Empirical Study on Emerging Economies

Bhama, Vandana; Jain, Pramod Kumar; Yadav, Surendra S.

doi:10.1016/s2212-5671(15)01279-4

Cited by 8 publications

(9 citation statements)

References 20 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Firms with a positive surplus in proportion to total assets would borrow less as they would be self-sufficient in terms of liquidity. Thus, Surplusta should have an inverse relationship with financial leverage (Shyam- Sunder and Myers, 1999;Chirinko and Singha, 1999;Myers and Majluf, 1984;Bhama et al, 2015Bhama et al, , 2016. We therefore formulate the following hypothesis.…”

Section: Objectivesmentioning

confidence: 99%

“…can be liquidated if required to repay lenders. A high proportion of fixed assets compared to total assets should directly relate to financial leverage (Zhang and Kanazaki, 2007;Kouki and Said, 2012;Bhama et al, 2015). Pecking order theory is supported by a tangibility coefficient of less than 0 (Frank and Goyal, 2003).…”

Section: Liquidity (Qr)mentioning

confidence: 99%

“…They also commanded that trade-off and pecking order theories characterise complementary approaches of the definition of company's capital structures. Bhama et al (2015) investigated the impact of deficits and surpluses quantum on the issue and redemption of debt in firms listed on the Bombay Stock Exchange (BSE) 500 and Shanghai Stock Exchange (SSE) 380 Index for the period 2003-2012. The study revealed that Indian and Chinese firms frequently issue debt during conditions of normal deficiency.…”

Section: Introductionmentioning

confidence: 99%

“…However, Smith and Watts (1992) argued that high growth firms use less debt in the capital structure. Bhama et al (2015), Chirinko and Singha (1999), and Huang (2011) adopted leverage ratio as the dependent variable.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Impact of cash surplus on firm’s capital structure: validation of pecking order theory

Chaklader

Padmapriya

2021

View full text Add to dashboard Cite

PurposeBuilding on pecking order theory, this study seeks to understand the various financial factors that influence top management's decision regarding the company’s capital structure. The authors attempt to understand and analyse whether the capital structure of mid‐ and small‐cap firms is affected by cash surplus scaled to total assets. Along with other determinants of capital structure such as liquidity, profitability, tangibility, market capitalisation and age, this is considered one of the major factors. Cash surplus is calculated using data from the cash flow statement. It is defined as the difference in cash from operating activities and that from investing activities and is scaled to total assets. To the best of the authors’ knowledge, this is the first study to regress cash surplus scaled to total assets and other determinants over leverage to examine the impact on mid‐ and small‐cap firms. The pecking order theory was found to hold for firms earning cash surplus.Design/methodology/approachData were collected from the CMIE Prowess database of all firms listed on the NIFTY Small cap 250 index and NIFTY Midcap 150 index. The data of non-financial firms belonging to the midcap and small-cap sector, listed on the National Stock Exchange of India from 2012 to 2019 were considered. After cleaning the data, an unbalanced panel of 171 companies totalling 1,362 observations for the NIFTY Small-cap 250 index and another panel of 96 companies with 761 observations for the NIFTY Midcap 150 index was created. Panel data regression analysis was used to determine the effect of cash surplus scaled to total assets on the firms' capital structure.FindingsThis study demonstrates how small- and midcap firms' behave differently in taking capital structure decisions. Pecking order theory was found to hold for firms earning cash surplus as a proportion of total assets (Surplusta).Research limitations/implicationsThe study was conducted through data available on secondary sources and database. The study can be better conducted by conducting a primary survey too. Further study may be conducted with a blend of secondary and questionnaire method. The results can be compared to check the similarity in findings.Practical implicationsManagers can benefit from the findings when making decisions on long- and short-term loans. This study can help managers in terms of the financial variables that have a role to play in the financial leverage of the company. The decision of the managers of midcap or small-cap firms would be different. Factors influencing short- and long-term borrowings are different. Academics can discuss whether there is any difference in the influence of capital structure variables of small- and midcap companies and the reasons for such differences. Judicious decisions on capital structure will create wealth for the shareholders as the right decision about leverage would result in a proper cost of capital. The findings also add to the existing literature on the Pecking order theory.Social implicationsAcademics can discuss whether there is any difference in the influence of capital structure variables of small- and midcap companies and the reasons for such differences.Originality/valueThe study extends the existing literature by demonstrating that the capital structure of mid and small-cap firms is affected by cash surplus scaled to total assets. The pecking order theory was found to hold for firms earning cash surplus. This study can inform the practitioners about the financial variables that have a role to play in the company's financial leverage. As the results and significance of the variables of the midcap or small-cap firms are different, the decisions of the managers of these firms would be separate for the capital structure of their firms. The study also infers that the factors influencing short and long-term borrowings are different. The study determines whether managers' decision-making in such companies is different in terms of raising short- and long-term loans. The study attempts to guide managers in considering the different variables that would influence their capital structure decisions, particularly the decision to include debt in the capital. Financial variables need not be of equal importance for managers belonging to small- and midcap companies.

show abstract

Section: Objectivesmentioning

confidence: 99%

Section: Liquidity (Qr)mentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Impact of cash surplus on firm’s capital structure: validation of pecking order theory

Chaklader

Padmapriya

2021

View full text Add to dashboard Cite

show abstract

“…Lemmon and Zender (2010) show that the pecking order theory is a good descriptor of the financing behaviour of the companies. Bhamaa et al (2015) have focused on companies with normal as well as large deficits and surpluses. Watson and Wilson (2002) support the pecking order in SMEs where information asymmetry is at particular intense.…”

Section: Market Timing Theorymentioning

confidence: 99%

Revisiting External Pecking Order Hypothesis: Evidence from Sri Lankan Companies Capital Structure

Rathnasingha¹,

Heiyanthuduwa²

2019

JFRM

View full text Add to dashboard Cite

This research is based on pecking order theory, which is one of the major capital structure determinant theory, driven by the information asymmetry. The purpose of this research is to investigate whether the pecking order theory provides an accurate description of companies financing choices in the context. Further, to examine whether informational asymmetry plays an important role in determining the financing hierarchy, and whether the financial deficit variable plays a key role determining the capital structure, the analysis has been conducted by utilizing a unique dataset from the Sri Lankan listed companies within multiple industrial sectors from 2011 to 2017. Empirical analysis has been done based on Panel data analysis model with regression tools suggested. The findings suggest that company's follow original pecking order hypothesis where companies' preference towards debt is higher than equity in determining their capital structure. Moreover, financing choices are contingent on informational asymmetry. Moreover, the financial deficit variable has a significant impact compared to four more conventional capital structure determinants. Journal of Financial Risk Management one of the mainstream approaches among the most influential theories of capital structure. The questions of how companies finance their operations and how they mix their sources of financing have loomed large since Miller (1958, 1963) published the celebrity paper on capital structure irrelevancy.According to Harris and Raviv (1991), many economists have contributed for developing capital structure theories based on agency costs, asymmetric information, product/input market interactions and corporate control considerations, following the path that has been mapped by Modigliani and Miller. Pecking order theory was first proposed by Donaldson (1961), which was thereupon developed by Myers and Majluf (1984) by adding theoretical framework. According to Myers (1984) and Myers and Majluf (1984), the key driving factor of the Pecking order theory is information asymmetry. Heterogeneity of the distribution of information between insiders (managers) of the company and the outside investors creates information asymmetry, which steers to adverse decisions whereas it leads to a certain order of choices between sources of finance.Diverging from the original pecking order theory assumption, several authors including Frank and Goyal (2003), Fama and French (2005) have formed contrary arguments. They argue that there is no significant pecking order in choosing external financing, and equity is not the last choice in financing, since equity is viewed as significantly better option than private debt. In addition, Frank and Goyal (2003) have raised concerns about information asymmetry as the driving force of pecking order theory whereby companies rely on retained profit, equity and then debt as the last choice for funding. Booth et al. (2001) state that there could be persistent differences across countries, indicating that specific country factors are at w...

show abstract

Asymmetric Information and Capital Structure

Miglo

2016

Capital Structure in the Modern World

View full text Add to dashboard Cite

Does Firms’ Pecking Order Vary during Large Deficits and Surpluses? An Empirical Study on Emerging Economies

Cited by 8 publications

References 20 publications

Impact of cash surplus on firm’s capital structure: validation of pecking order theory

Impact of cash surplus on firm’s capital structure: validation of pecking order theory

Revisiting External Pecking Order Hypothesis: Evidence from Sri Lankan Companies Capital Structure

Asymmetric Information and Capital Structure

Contact Info

Product

Resources

About