Testing of Pecking Order Theory in Pakistan

3284 WordsJul 17, 201814 Pages
This study tests the Pecking Order Theory for the capital structure of listed firms in Pakistan. As per Pecking Order Theory in capital structure formulation internally generated resources would have first priority followed by debt issuance where as equity is used as last resort. In its strong form, the Pecking Order Theory sustains that equity issues would never occur, whereas in its weak form, limited amounts of issues are acceptable. The methodology adopted in this empirical study involves cross-section regressions and the testing of hypotheses stemming from the underlying theory in its strong and weak forms. The sample of capital structure of non financial firms from KSE is considered from for 2001 to 2008. The statistical tool of…show more content…
Within the Pakistani scenario, there are several studies for investigating if different capital structure theories replicates in Pakistan the same results obtained in countries with more developed economies and markets, especially the US and some European countries. However, such studies either do not specifically test the Pecking Order in Pakistan or do not use a methodology comparable to the one utilize here. After vast discussion optimal capital structure still under conversation exploration toward the finalization still exist under both theories of capital structure. The remaining parts of the paper are as follows: Section 2 presents a literature review; Section 3 describes the data, the methods utilized; Section 4 analyzes the results obtained; Section 5 presents the conclusions; and Section 6 describes the recommendation; and section 7 describes references. 2-Literature Review In general pecking order theory says that most of the firms follows a hierarchy ,when financing their projects, first finance by internal equity followed by debt issues, and finally by external equity . New stock is issued at last option. This hierarchical order is fundamental to the packing order theory. If a firm issue new stock at first place then pecking order theory does not hold. The pecking order theory also implies that more profitable firms naturally prefer internal financing they would finance their new projects without issuing debt or equity
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