The Pecking Order, Information Asymmetry, and Financial Market Efficiency
49 Pages Posted: 25 Oct 2006
Date Written: July 10, 2007
Abstract
This paper studies the marginal debt issuance behavior of publicly traded companies with firm-level data from 42 countries. The focus is on the extent to which measures from the literature on finance and development can help to explain the observed differences among countries in the corporate use of marginal debt financing. Using the pecking order testing framework of Shyam-Sunder and Myers (1999), this study provides empirical evidence that financial market imperfections and institutional development affect the debt issuance decisions of firms when raising external capital. Country development, Law enforcement, legal origin, shareholder protections, effectiveness of the government, and control of corruption are significantly related to marginal debt issuance decisions of firms. Finally, the coefficient estimates of the pecking order regressions are correlated with the long run average growth rates of the countries and appear to be a powerful objective measure of financial market efficiency.
Keywords: Pecking Order Theory, Capital Structure, Financing Deficit, Equity Market Efficiency
JEL Classification: G32, G00, F30
Suggested Citation: Suggested Citation
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