COVERAGE OF FINANCING DEFICIT IN FIRMS IN FINANCIAL DISTRESS UNDER THE PECKING ORDER THEORY


Finance

COVERAGE OF FINANCING DEFICIT IN FIRMS IN FINANCIAL DISTRESS UNDER THE PECKING ORDER THEORY

Capital structure has been a frequent topic in financial literature because it is one of the most important decisions a firm can make. Although many important contributions have been made in this area, most of the research does not include firms in financial distress, so the financing decisions adopted by these firms are still not well known. The financing decisions of those firms are very important because most of the strategy decisions such as investments, market entry, or product diversification are considerably affected by the financial constraints faced by them (Bowe, Filatotchev, & Marshall, 2010).
Jméno a příjmení autora:

Sergio Sanfilippo-Azofra, Carlos López-Gutiérrez, Begoña Torre-Olmo

Rok:
2016
Ročník:
19
Číslo:
4
Klíčová slova:
Capital structure, financial distress, pecking order
DOI (& full text):
Anotace:
The financing decisions adopted by firms in financial distress are very important because most of the strategy decisions such as investments, market entry, or product diversification are considerably…více
The financing decisions adopted by firms in financial distress are very important because most of the strategy decisions such as investments, market entry, or product diversification are considerably affected by the financial constraints faced by them. However, these decisions are still not well known and empirical evidence about firms in financial distress is controversial. Previous studies do not find support for either the trade-off theory or the pecking order theory, which explain the financial decisions of healthy firms. Distressed firms frequently have to use all of their available financial resources to cover their financing deficit. This could give rise to a concave quadratic relationship between financing deficit and net debt issued, which might well explain the ambivalent results about the financial decisions of these firms. To analyze this quadratic relationship, which has not been studied previously, we perform an empirical analysis on a sample of 3,337 listed firms from Germany, Canada, the United States, France, Italy and the United Kingdom. Our results show that the pecking order theory does not appear to have a higher explanatory power in healthy firms. Moreover, the hierarchy suggested by the pecking order theory is not totally applicable in firms in financial distress. Our results show that as financing deficit grows, these firms use debt decreasingly, which gives rise to a concave quadratic relationship between financing deficit and net debt issued. This suggests that firms in financial distress have difficulty issuing new debt. Our results also show that firms in financial distress have a greater probability of issuing equity. Therefore, these firms can use equity financing as an alternative to debt issuance.
Sekce:
Finance

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