Testing the Static Trade-off and Pecking Order Theories in Capital Structure of TSE Accepted Companies

Journal of Accounting Advances (J.A.A)
Vol. 2, No. 2, Fall & Winter 2010, Ser. 59/3
 
 
Extended Abstract
 
Testing the Static Trade-off and Pecking Order Theories in Capital Structure of TSE Accepted Companies
 
Dr. F. Nasirzadeh          A. R. Mostaqiman
Ferdowsi University of Mashhad
 
Introduction
       This study examines two theories including static trade-off and pecking order theories which belong to the capital structure’s theories. According to static trade-off theory, firms are searching for an optimum capital structure which maximizes the corporate value. Regarding this theory, firms ask for establishing a balance between benefits and cost of issuing the debts. The benefits of issuing the debts would be the tax deductibility of the interest and conflict decreasing between the shareholders and managers. On the other hand, the cost of issuing the debts would comprise potential bankruptcy cost and conflict between the shareholders and creditors. According to the pecking order theory, regardless to leverage optimal, financing decision through the internal funds would be the priority for firms, and when the internal funds are not enough, they use the external funds; in the meantime, they prefer issuing the debts to issuing the shares.
 
Research questions or Hypotheses
       First hypothesis: capital structure model of TSE accepted companied can be defined by static trade-off theory.
       Second hypothesis: capital structure model of TSE accepted companied can be defined by pecking order theory.
       Undoubtedly, the acceptance of each of these theories does not necessarily mean another’s rejection.
 
 
Methods
       Statistical community of this study includes all TSE accepted companies and the examined sample includes 279 companies from 21 various industries. Thereafter, the data of 279 companies for the period of 5 years from 2002 to 2006 is being analyzed. The nature of data is compound in this study, a combination of time series and cross sectional data. The data are analyzed by the descriptive statistical methods, and for testing the hypotheses, time series cross sectional regression is used.
 
Results
       Results show that none of these theories can explain company’s capital structure. Nevertheless, the evidences are of the static trade-off theory. Testing the given hypotheses based on the industry shows the confirmation of the pecking order theory which emphasizes the importance of industry kind in order to determine the companies’ financing decision behavior.
 
Discussion and conclusion
       Results indicate a positive significant relationship between the long-term debt changes of studied companies and the required adjustment in order to gain the optimal leverage. In other words, the studied companies have tried to reach the long-term debts to the industry average debt which support the static trade-off theory. However, these conclusions cannot be generalized to all industries since there are just 12 studied industries in which the first hypothesis is accepted. The conclusions which result from the static trade-off theory differ from Sunder and Myers’ (1998) confirming the pecking order theory. Even though, the results are of the Flannery and Rangan’s (2006); and are of the Bagherzadeh’s researches in Iran which confirm the static trade-off theory more.