Testing the pecking order theory: the importance of methodology

Abstract

PurposeThe purpose of this paper is to show that different methodologies may lead to different implications about the validity of the pecking order theory.Design/methodology/approachUsing data from Greek firms as a starting‐point, the paper first investigates whether they follow the financing pattern implied by the pecking order theory and then illustrates that conclusions concerning the pecking order should be carefully shaped by researchers, as the methodology used can be misleading. Two different information sources are used; the first is data derived from the financial statements of the Greek firms listed in the Athens Exchange, while the second comprises the answers to a detailed questionnaire.FindingsIt is shown that a negative relationship between leverage and profitability does not necessarily mean that the pecking order financing hierarchy holds. Analysis should not rely solely on the mean‐oriented regression quantitative analysis to test the pecking order theory, as it refers to a distinct hierarchy.Research limitations/implicationsFurther research should focus on investigating the reasons that underlie actual firm financing.Practical implicationsThe fact that the pecking order is actually a hierarchy makes research in this field more complex. Analysts should consider this special feature of the pecking order approach when analyzing the existence of the pecking order financing pattern. The methodology followed is of crucial importance in the analysis of the existence of the pecking order financing pattern.Originality/valueTo the authors' knowledge, this is the first paper to test the pecking order pattern of financing using simultaneously quantitative and qualitative data, and to compare results and conclusions drawn from these two different types of methodology.

Théories financières et endettement des PME en France

“…La définition du financement hiérarchique fondé sur la séquence fonds propres -dette non risquée -dette risquée -ouverture du capital est discutée par Vasiliou, Eriotis et Daskalakis (2009) ; ils signalent que la priorité à la mobilisation des ressources internes, si elle est avérée, n'implique pas nécessairement que l'étape suivante corresponde à la dette. Il y aurait lieu de dissocier une étape initiale de la POT (fonds propres) d'une seconde étape de la POT (dette ou ouverture du capital).…”

Behavioral Capital Structure: Is the Neoclassical Paradigm Threatened? Evidence from the Field

“…18 The conclusion is that firms seem to consider retained earnings as a very important source of their new investment funding. Vasiliou, Eriotis, and Daskalakis [2006] say that firms prefer internal funds to raising new capital, showing that retained earnings come first in preference order regarding investment financing among all other alternatives.…”

Debt Financing Option and Financial Performance of Micro and Small Enterprises: A Critical Literature Review

“…Mixed results of positive, negative and no relationship between debt financing option and financial performance measured in terms of trade credit short-term loan, and long-term loan, on one hand and return on assets, current ratio and gross profit margin on the other hand were generated (Myers & Majluf, 1984;Daskalakis, & Psillaki, 2008;Vasiliou, Eriotis, & Daskalakis, 2009;Myers, 1997;Amirkhani&Fard, 2009). …”

“…However studies by Daskalakis and Psillaki (2008), Vasiliou et al (2009), Rajan (1992 and Myers amd Majluf (1984) show a negative relationship between debt financing option and financial performance. Ebaid (2013) found no significant relationship between debt financing option as measured by long-term loan and return on assets.…”

“…The reviews manifested conflicting effects of debt financing option on financial performance of MSEs (Myers & Majluf 1984;Daskalakis & Psillaki 2008;&Vasiliou et al, 2009;Rajan 1992). Because of the high cost of long term debt as portrayed by the literature reviews, the chance of MSEs being put under receivership is real and eminent (Roshanak Heshemi, 2013).…”