Firm Maturity and the Pecking Order Theory

Abstract

We identify firms according to two life cycle stages, namely growth and maturity, and test the pecking order theory of financing. We find a strong maturity effect, i.e. the pecking order theory describes the financing behavior of mature firms better than growth firms. Our findings show that firm maturity is an alternative proxy for debt capacity. In particular, mature firms are older, more stable and highly profitable with good credit histories. Thus, they naturally have greater debt capacity. After controlling for firm maturity, the pecking order theory describes the financing behavior of firms fairly well.

Théories financières et endettement des PME en France

“…À l'appui de la POT, Berger et Udell (1990) font valoir que les PME recourent moins à l'endettement au fur et à mesure que leur cycle de vie les conduit de la jeunesse à la maturité. Bulan et Yan (2010) considèrent de même que la maturité permettrait aux entreprises d'accéder aux marchés. Vanecker et Manigart (2010) suggèrent une « POT étendue » qui distingue entreprises profitables (POT 1) et entreprises non profitables (POT 2) et qui peut s'appliquer aux entreprises à potentiel élevé de croissance.…”

The role of life cycle on the firm’s capital structure = El papel del ciclo de vida en la estructura de capital de la empresa

“…But the notion of life stage seems to be elusive, and empirical literature has used a varied number of classifications, ranging from two (Bulan and Yan, 2010) or three stages to as many as ten (Adizes, 1999). This varied number of stages is the first reason for some lack of consistence in results across studies.…”

“…The empirical evidence is nowadays incipient, being still scarce even in grey literature. Factors such as size, age, profitability, tangible assets, retained earnings (all of them used by Bulan andYan, 2010), or dividends (DeAngelo et al, 2006), show different leverage patterns when firms are mature, as the maturity effect is related to debt capacity or affordability. Bulan and Yan (2010) identify firms in two stages, growth and maturity, finding that the pecking order theory (based on the information asymmetry between investors and firm managers) better describes the financing behavior of mature rather than growing firms.…”

“…Factors such as size, age, profitability, tangible assets, retained earnings (all of them used by Bulan andYan, 2010), or dividends (DeAngelo et al, 2006), show different leverage patterns when firms are mature, as the maturity effect is related to debt capacity or affordability. Bulan and Yan (2010) identify firms in two stages, growth and maturity, finding that the pecking order theory (based on the information asymmetry between investors and firm managers) better describes the financing behavior of mature rather than growing firms. Using a different life stage model, both Frielinghaus, Mostert and Firer (2005) and Teixeira and Coutinho (2005) find results consistent with the pecking order theory and confirm that firms tend to adopt specific financing strategies as they progress along their lives.…”

Las etapas del ciclo de vida de la empresa por los patrones del estado de flujo de efectivo y el riesgo de insolvencia empresarial

“…A su vez, la ausencia de autofinanciación y las necesidades de inversión de capital producen que los flujos de efectivo de las actividades de financiación sean positivos. Según la teoría de las jerarquías financieras (Myers, 1984;Bulan y Yan, 2010), a efectos de financiar las nuevas oportunidades de inversión ante la falta de autofinanciación, se recurre a las deudas. En esta etapa, la mayor parte de la financiación se realiza mediante deudas bancarias sin intermediación y de corto plazo (Diamond, 1984;Barclay y Smith, 1995).…”