Testing of Packing Order Theory in Case of Pakistan

2549 WordsJul 12, 201811 Pages
(1) Introduction There are three main capital structure theories which materialized from the reflections on the Modigliani and Miller (MM) Theorem (1958) first static tradeoff theory, Agency cost theory and Pecking order theory. This study is undertaken in Pakistan perspective. The phenomena that developed by MM about market perfection under critics in gaze of mentioned theories. The Pecking Order Model is component of capital structure was developed by Myers C.S et al 1984. It state that companies prioritize their source of financing in descending order (from retain earning to new stock ) internal funds are used first by retain earning, depreciation, and when that is used up, debt is issued, and when it is not sensible to issue any…show more content…
The study is taken on 17000 firms 41 different foreign countries with non financial companies By Abu Jalal (2007) found that due to information asymmetry and adverse selection costs firms always use debt financing rather using equity financing whenever they have financing needs. In developed countries like US they did not depend as much as firms of developing countries depend. The impact of debt financing depends on the availability of investment opportunities in every country, either low growth firms or high growth firms accordingly agency costs differ across the countries due to dissimilar legal and financial structures (Raj Aggarwal et al 2006). Partial support exist Pecking order theory toward capital structuring neither static trade off nor pecking order theories defined the capital structure phenomena exactly failed to design optimal capital structure of firm (Erdinc Karadeniz et al 2009). Asymmetric information isn’t problematic factor when small growth firm finance through issuing new equity managers acted to accommodate insider maximize their wealth to heighten private benefits in consequence high level insider ownership of clearly lead to an optimal capital value (Xueping Wu et al 2004). Considering internal funds deficiency is most important factor toward issuing new

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