Can the Pecking Order Explain the Costs of Raising Capital?

Abstract

Using an econometric model to estimate issue costs for new external capital, I provide evidence that challenges the pecking order's predictions. Strongly counter to the pecking order, I find that debt costs often exceed equity costs, especially for firms without access to public debt. While the results suggest information asymmetry effects in the costs of raising external capital, I find no evidence that information asymmetry pushes firms toward a pecking order.

Keywords: Capital Structure, Pecking Order Theory, Transaction Costs

JEL Classification: G32