Gauging a Firm's Financing Orientation: Integrating Predictions of the Trade-Off Theory, the Pecking Order Model, and the Market Timing Hypothesis

2011 ◽  
Author(s):  
Shanhong Wu ◽  
Joseph P. Ogden
Keyword(s):  
Market Timing ◽  
Order Model ◽  
Pecking Order ◽  
Trade Off ◽  
Timing Hypothesis

scholarly journals A Critical Review of Capital Structure Theories

2012 ◽  
Vol 4 (11) ◽  
pp. 553-557 ◽  
Author(s):  
Syed Muhammad Javed ◽  
Agha Jahanzeb . ◽  
Saif-ur-Rehman .
Keyword(s):  
Capital Structure ◽  
Critical Review ◽  
Market Timing ◽  
Order Theory ◽  
Agency Cost ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Trade Off

The purpose of this paper is to scrutinize and appreciate the theories of capital structure starting from theory of Miller and Modigliani (1958) of capital structure, which is also known as irrelevance theory of capital structure and also including theory like pecking order theory, trade off theory, market timing theory and agency cost theory. In addition, authors have tried to explain the theories and their contradiction with each other in detail. This paper will be an addition to understand the theories of capital structure.

scholarly journals Firm characteristics and capital structure adjustment

2018 ◽  
Vol 15 (2) ◽  
pp. 129-144 ◽  
Author(s):  
Winston Pontoh ◽  
Novi Swandari Budiarso
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Market Timing ◽  
Order Theory ◽  
Free Cash Flow ◽  
Internal Conflict ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Trade Off ◽  
Public Firms

The adjustment for the firm capital structure is unclear from perspectives of trade-off theory, pecking order theory, life cycle theory, market timing theory, and free cash flow theory, since many research findings contradict each other. Adjustments for the capital structure are complex, since the conditions for each firm are different. The objective of this study is to provide empirical evidence of how firms adjust capital structure in relationship with maturity in context of trade-off, pecking order, free cash flow, and market timing theory. In terms of hypotheses testing, this study conducts logistic regression analysis with 138 Indonesian public firms as the sample in the observed period from 2010 to 2015. To distinguish the results, this study controls the sample by size and age based on the median. The study reports that preferences for the source of funds based on the cost of capital, internal conflict, and firm maturity indicate adjustments for the firm capital structure. Based on Indonesian firms, the form of capital structure in developing countries can refer to a single model or a combination of the trade-off model and pecking order model, as well as market timing.

scholarly journals Capital Structure Theory: An Overview

2017 ◽  
Vol 6 (1) ◽  
pp. 133 ◽  
Author(s):  
D.K.Y Abeywardhana
Keyword(s):  
Capital Structure ◽  
Market Timing ◽  
Order Theory ◽  
Structure Theory ◽  
Cost Of Debt ◽  
Equity Financing ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Trade Off ◽  
Capital Structure Theory

Capital structure is still a puzzle among finance scholars. Purpose of this study is to review various capital structure theories that have been proposed in the finance literature to provide clarification for the firms’ capital structure decision. Starting from the capital structure irrelevance theory of Modigliani and Miller (1958) this review examine the several theories that have been put forward to explain the capital structure.Three major theories emerged over the years following the assumption of the perfect capital market of capital structure irrelevance model. Trade off theory assumes that firms have one optimal debt ratio and firm trade off the benefit and cost of debt and equity financing. Pecking order theory (Myers, 1984, Myers and Majluf, 1984) assumes that firms follow a financing hierarchy whereby minimize the problem of information asymmetry. But neither of these two theories provide a complete description why some firms prefer debt and others prefer equity finance under different circumstances.Another theory of capital structure has introduced recently by, Baker and Wurgler (2002), market timing theory, which  explains the current capital structure as the cumulative outcome of past attempts to time the equity market. Market timing issuing behaviour has been well established empirically by others already, but Baker and Wurgler (2002) show that the influence of market timing on capital structure is regular and continuous. So the predictions of these theories sometimes acted in a contradictory manner and Myers (1984) 32 years old question “How do firms choose their capital structure?” still remains. 

scholarly journals The Effect of Pecking Order, Trade-Off and Market Timing Theories onCapital Structure in Commercial Banking Companies Listed on IDX

2017 ◽  
Vol 7 (2) ◽  
Author(s):  
Laely Aghe Africa
Keyword(s):  
Capital Structure ◽  
Market Timing ◽  
Order Theory ◽  
Commercial Banking ◽  
Management Policy ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Trade Off ◽  
Total Debt

Capital structure has an impact on the short and long term. Funding provided by banks is inseparable from the availability of funds from third parties in the form of savings, demand deposits and deposits. The entry of third party funds must be balanced with the funds disbursed by the company. Therefore, management policy greatly determines the position and composition of funding. This study aims to analyze and determine several capital structure theories, namely Pecking Order Theory, Trade-Off Theory and Market Timing Theory. The variable of Pecking Order Theory is represented by funding deficit, long-term debt, and total debt. The variable of Trade-Off Theory is represented by tangible assets, growth, size, profitability, total debt, and long-term debt. The variable of Market Timing Theory is represented by Equity Finance Weighted Average of market to book ratio and leverage ratio. This research is quantitative research. The samples used in this study are 100 data of commercial banking companies listed on IDX period 2011 - 2015. Data are obtained using purposive sampling method from banks registered at www.idx.go.id. Multiple Liner Regression is used in analyzing data using SPSS IBM 23. The results of the research show that Trade-Off and Market Timing Theoriescan be implemented by banking companies in terms of determining capital structure. This research implication is to enhance management choices, especially on how to set capital structure of the company.

scholarly journals KEBIJAKAN STRUKTUR MODAL DAN EFEK WAKTU PASAR

2014 ◽  
Vol 9 (3) ◽  
Author(s):  
Winston Pontoh
Keyword(s):  
Regression Analysis ◽  
Capital Structure ◽  
Market Timing ◽  
Pecking Order ◽  
Trade Off ◽  
The Capital Structure

The capital structure policy of each entities often related with two main theories which are trade off and pecking order. But, there is another factor that could affecting the capital structure, which is market timing. The objective of this study is prove whether the capital structure of each entities are affected by these two main theories or market timing. Conducting regression analysis, this study found that, the capital structure of each entities in Indonesia most dominated by market timing, although as general, seems these entities following trade off model.

scholarly journals What Drives Security Issuance Decisions Of Firms Listed On The Johannesburg Stock Exchange: Market Timing Or Dynamic Trade-Off Theory Or Both?

2015 ◽  
Vol 31 (6) ◽  
pp. 2047
Author(s):  
Vusani Moyo
Keyword(s):  
Capital Structure ◽  
Stock Exchange ◽  
Market Timing ◽  
Weighted Average ◽  
Debt Ratio ◽  
Pecking Order ◽  
Trade Off ◽  
Financial Firms ◽  
Johannesburg Stock Exchange ◽  
Target Leverage

This study used the random effects Tobit model to investigate the validity of the market timing, trade-off and pecking order hypotheses of capital structure in 143 non-financial firms listed on the Johannesburg Stock Exchange. The results show that leverage is positively correlated to the modified external finance weighted average market-to-book ratio (EFWAMB). Firm profitability and growth rate are negatively correlated to leverage whilst firm size and asset tangibility are positively correlated to leverage. The firms also have target leverage ratios towards which they actively adjust at an unbiased speed of 41.80% for the market-to-debt ratio and 52.82% for the book-to-debt ratio. EFWAMB has a negligible effect on the firms’ speeds of adjustment towards target leverage. The results are robust. These results reject the market timing hypothesis in support of the dynamic trade-off and pecking order hypotheses. They further confirm the fact that these two theories of capital structure are not mutual exclusive. 

scholarly journals The international evidence of pecking order and trade-off predictions

2010 ◽  
Vol 7 (4) ◽  
pp. 183-196
Author(s):  
Nuttawat Visaltanachoti ◽  
Robin Luo ◽  
Cai Wei
Keyword(s):  
Order Model ◽  
Short Term ◽  
Pecking Order ◽  
Corporate Financing ◽  
Trade Off ◽  
Financing Decisions ◽  
Investment Opportunities ◽  
Term Variation ◽  
Target Leverage

This paper investigates the pecking order and trade-off hypotheses of corporate financing decisions for a sample of 74 countries from 1993 to 2003. Overall, the results confirm predictions shared by the trade-off and pecking order models in that the payout ratio is positively related to profitability and negatively related to investment opportunities, target leverage and volatility. The present study also provides favorable evidence to the pecking order model in that more profitable firms are less levered. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment.

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