Empirical Test of Pecking Order Theory for the US Listed Firms

Abstract

This paper is aimed at examining the appropriateness of pecking order theory in the US financial market. One of the most popular models of firm’s capital structure driven by asymmetric information is the pecking order theory (POT) of Myers (1984). It is based on the argument that firms have preference ranking over sources of funds for financing based on the corresponding information asymmetry costs (Myers et al. 1984, p.15). In recent studies, many interesting discussions have been generated about the POT. These studies attempt to detect the extent to which POT describes the financing choices of firms. The results of relevant studies as well as recent evidence in the context of the US economy are presented in this research paper. Aggregated, disaggregated and controlled variable methods are employed for testing relevance of POT by using the sample of firms over three-year period. Results of the current research can help to understand how the US listed firms determine their optimal debt levels.