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SUSTAINABLE GROWTH AND CHOICE OF FINANCING: A TEST OF THE PECKING ORDER HYPOTHESIS
Author(s) -
Klein Daniel P.,
Belt Brian
Publication year - 1994
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/j.1873-5924.1994.tb00578.x
Subject(s) - pecking order , pecking order theory , equity (law) , debt , order (exchange) , finance , equity financing , external financing , internal financing , logit , economics , business , contingency , monetary economics , capital structure , econometrics , linguistics , philosophy , evolutionary biology , political science , law , biology
This paper studies the impact of sales growth above a sustainable level on the financing choices of the firm. Myers [1984] indicates that firms typically employ a pecking order of financing choices, using internal equity before the issuance of external debt, followed by the issuance of external equity. Contingency table analysis performed in this paper provides indirect evidence that the faster firms are growing, the more they use up available internal financing and, thus, must raise funds externally. In addition, logit analysis shows that firms with lower asymmetric information tend to raise the majority of their funds externally, with debt being the primary choice. Together, both sets of results provide indirect support for Myers' pecking order theory since it appears that firms use available internal financing, then debt, then new equity to finance growth.