JFRM  Vol.8 No.4 , December 2019
Revisiting External Pecking Order Hypothesis: Evidence from Sri Lankan Companies Capital Structure
Abstract: 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.
Cite this paper: Rathnasingha, D. and Heiyanthuduwa, C. (2019) Revisiting External Pecking Order Hypothesis: Evidence from Sri Lankan Companies Capital Structure. Journal of Financial Risk Management, 8, 200-223. doi: 10.4236/jfrm.2019.84014.

[1]   Ajanthan, A. (2013). Determinants of Capital Structure: Evidence from Hotel and Restaurant Companies in Sri Lanka. International Journal of Scientific and Research Publications, 3, 1-8.

[2]   Allini, A., Rakha, S., McMillan, D. G., & Caldarelli, A. (2017). Pecking Order and Market Timing Theory in Emerging Markets: The Case of Egyptian Firms. Research in International Business and Finance, 44, 297-308.

[3]   Baker, M., & Wurgler, J. (2002). Market Timing and Capital Structure. Journal of Finance, 57, 1-32.

[4]   Bhamaa, V., Jaina, P. K., & Yadav, S. S. (2015). Does Firms’ Pecking Order Vary during Large Deficits and Surpluses? An Empirical Study on Emerging Economies. Procedia Economics and Finance, 30, 155-163.

[5]   Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital Structure in Developing Countries. Journal of Finance, 56, 87-130.

[6]   Chen, D., Chen, C., Chen, J., & Huang, Y. (2013). Panel Data Analyses of the Pecking Order Theory and the Market Timing Theory of Capital Structure in Taiwan. International Review of Economics and Finance, 27, 1-13.

[7]   Chen, J. J. (2004). Determinants of Capital Structure of Chinese-Listed Companies. Journal of Business Research, 57, 1341-1351.

[8]   Chirinko, R. S., & Singha, A. R. (2000). Testing Static Tradeoff against Pecking Order Models of Capital Structure: A Critical Comment. Journal of Financial Economics, 58, 417-425.

[9]   Colombage, S. R. (2005). Sectorial Analysis of Corporate Capital Structure Choice—Emerging Market Evidence from Sri Lanka. Journal of Asia Pacific Business, 6, 5-35.

[10]   Degryse, H., Goeij, P., & Kappert, P. (2012). The Impact of Firm and Industry Characteristics on Small Firm’s Capital Structure. Small Business Economics, 38, 431-447.

[11]   Delcoure, N. (2007). The Determinants of Capital Structure in Transitional Economies. International Review of Economics and Finance, 16, 400-415.

[12]   Donaldson, G. (1961). Corporate Debt Capacity: A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity. Division of Research, Graduate School of Business Administration, Harvard University, Boston.
https Gordon%2C&qt=hot_author

[13]   Fama, E. F., & French, K. R. (2002). Testing Trade-Off and Pecking Order Predictions about Dividends and Debt. Review of Financial Studies, 15, 1-33.

[14]   Fama, E. F., & French. K. R. (2005). Financing Decisions: Who Issues Stock? Journal of Financial Economics, 76, 549-582.

[15]   Frank, M. Z., & Goyal, V. K. (2003). Testing the Pecking Order Theory of Capital Structure. Journal of Financial Economics, 67, 217-248.

[16]   Harris, M., & Raviv, A. (1991). The Theory of Capital Structure. Journal of Finance, 46, 297-355.

[17]   Hausman, J. A. (1978). Specification Tests in Econometrics. Econometrica, 46, 1251-1271.

[18]   Helwege, J., & Liang, N. (1996). Is There a Pecking Order? Evidence from a Panel of IPO Firms. Journal of Financial Economics, 40, 429-458.

[19]   Huang, R., & Ritter, J. R. (2009). Testing Theories of Capital Structure and Estimating the Speed of Adjustment. Journal of Financial and Quantitative Analysis, 44, 237-271.

[20]   Jung, K., Kim, Y. C., & Stulz, R. M. (1996). Timing, Investment Opportunities, Managerial Discretion, and the Security Issue Decision. Journal of Financial Economics, 42, 159-185.

[21]   Komera, S., & Lukose, J. (2015). Capital Structure Choice, Information Asymmetry, and Debt Capacity: Evidence from India. Journal of Economics and Finance, 39, 807-823.

[22]   Lemmon, M. L., & Zender, J. F. (2010). Debt Capacity and Tests of Capital Structure Theories. Journal of Financial and Quantitative Analysis, 45, 1161-1187.

[23]   Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48, 261-297.

[24]   Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. American Economic Review, 53, 433-443.

[25]   Myers, S. C. (1984). The Capital Structure Puzzle. Journal of Finance, 39, 574-592.

[26]   Myers, S. C. (2001). Capital Structure. Journal of Economic Perspectives, 15, 81-102.

[27]   Myers, S. C., & Majluf, N. S. (1984). Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have. Journal of Financial Economics, 13, 187-221.

[28]   Rajan, R. G., & Zingales, L. (1995). What Do We Know about Capital Structure? Some Evidence from International Data. Journal of Finance, 50, 1421-1460.

[29]   Samarakoon, L. (1999). The Ownership Structure of Sri Lankan Companies. Sri Lankan. Journal of Management, 4, 143-157.

[30]   Sánchez-Vidal, J., & Martín-Ugedo, J. F. (2005). Financing Preferences of Spanish Firms: Evidence on the Pecking Order Theory. Review of Quantitative Finance and Accounting, 25, 341-350.

[31]   Schoubben, & van Hulle, C. (2004). The Determinants of Leverage. Differences between Quoted and Non Quoted Firms. Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business. No. 4, 589-621.

[32]   Senaratne, S (1998). Pecking Order of Financing: Empirical Evidence in Sri Lankan Capital Market. Sri Lankan Journal of Management, 3, No. 1 & 2.

[33]   Shyam-Sunder, L., & Myers, S. C. (1999). Testing Static Trade off against Pecking Order Models of Capital Structure. Journal of Financial Economics, 51, 219-244.

[34]   Shyam-Sunder, L., & Myers, S. C. (1994). Testing Static Trade-Off against Pecking Order Models of Capital Structure, MIT Sloan School of Management, Cambridge.

[35]   Singh, A., & Hamid, J. (1992). Corporate Financial Structure in Developing Countries, Papers 1. World Bank-International Finance Corporation.

[36]   Wang, K. A., & Lin, C. A. (2010). Pecking-Order Theory Revisited: The Role of Agency Cost. Manchester School, 78, 395-411.

[37]   Watson, R., & Wilson, N. (2002). Small and Medium Size Enterprise Financing: A Note on Some of the Empirical Implications of a Pecking Order. Journal of Business Finance Accounting, 29, 557-578.

[38]   Wellalage, N. H., & Locke, S. (2014). The Capital Structure of Sri Lankan Companies: A Quantile Regression Analysis. Journal of Asia-Pacific Business, 15, 211-230.

[39]   Zhang, R., & Kanazaki, Y. (2007). Testing Static Trade-off against Pecking Order Models of Capital Structure in Japanese Firms. International Journal of Accounting & Information Management, 15, 24-36.