Testing the pecking order model of corporate leverage: An empirical investigation of Turkish firms

Abstract

This research investigates the pecking order model of corporate leverage for a sample of 53 Turkish industrial firms listed on Istanbul stock exchange during the period from 2008 to 2017. The study tries to concentrate on the predictions about how corporate leverage varies with investments, profitability, risk, firm size and tangibility. The coefficients of corporate leverage determinants are estimated by using Ordinary Least Squares and Binary Logistic regressions. Confirming the pecking order model, it is found that firms prefer to use internal cash flows over external financing to fund investments. Moreover, the empirical results also show that more profitable and risky firms tend to borrow less. On the other hand, firms with more investments and larger firms tend to have more leverage. The findings of this study will help the managers to design a better strategy about capital structure which can maximize firm’s performance.

Keywords

• Pecking Order Model,Leverage,Turkish Firms

References

1. Bradley, M., Jarrel, G. A., & Kim, E. H. (1984). On the Existence of an Optimal Capital Structure: Theory and Evidence. Journal of Finance, 39(3), 857-878.
2. Burucu, H., & Öndeş, T. (2016). Türk İmalat Sanayi Firmalarının Sermaye Yapısını Etkileyen Faktörlerin Analizi. Çankırı Karatekin Üniversitesi, İktisadi ve İdari Bilimler Fakültesi Dergisi, 6(1), 201-225.
3. Cevheroglu-Acar, M. G. (2018). Determinants of Capital Structure: Empirical Evidence from Turkey. Journal of Management and Sustainability, 8(1), 31-45.
4. Chen, H., & Hammes, K. (1997). Capital Structure, Theories and empirical results - a panel data analysis. Paper presented at Conference on Financial Regulation, Groningen, Netherlands.
5. Erol, A. F., Aytekin, S., & Abdioğlu, N. (2016). İşletmelerin Sermaye Yapılarının Belirlenmesinde Finansal Hiyerarşi Teorisinin Kullanımı ve BIST’te Bir Uygulama. KSÜ Sosyal Bilimler Dergisi, 13(1), 113-128.
6. Fama, E. F., & French, K. R. (2002). Testing Trade-Off and Pecking Order Predictions about Dividends and Debt. Review of Financial Studies, 15(1), 1-33.
7. Fosberg, R. H. (2008). Debt Capacity and Debt Financing. Journal of Business & Economics Research, 6(8), 21-26.
8. Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics 67, 217–248.

9. Frank, M. Z., & Goyal, V. K. (2009). Capital Structure Decisions: Which Factors Are Reliably Important?. Financial Management, 38(1), 1-37.
10. Gaud, P., Jani, E., Hoesli, M., & Bender, A. (2003). The Capital Structure of Swiss Companies: An Empirical Analysis Using Dynamic Panel Data. The International Center for Financial Asset Management and Engineering (FAME), Research Paper 68, 1-28.
11. Goh, C. F., Tai, W. Y., Rasli, A., Tan, O. K., & Zakuan, N. (2018). The Determinants of Capital Structure: Evidence from Malaysian Companies. International Journal of Supply Chain Management, 7(3), 225-230.
12. Gülşen, A. Z., & Ülkütaş, Ö. (2012). Sermaye Yapısının Belirlenmesinde Finansman Hiyerarşi Teorisi ve Ödünleşme Teorisi: İMKB Sanayi Endeksinde Yer Alan Firmalar Üzerinde Bir Uygulama. ZKÜ Sosyal Bilimler Dergisi, 8(15), 49-59.
13. Güner, A (2016). The Determinants of Capital Structure Decisions: New Evidence from Turkish Companies. Procedia Economics and Finance 38, 84 – 89.
14. Ilyukhin, E. V. (2017). The Determinants of Capital Structure: Evidence of Russia. Journal of Corporate Finance Research, 14(4).
15. Karadeniz, E., Kandir, S. Y., Balcilar, M., & Onal, Y. B. (2009). Determinants of Capital Structure: Evidence from Turkish Lodging Companies. International Journal of Contemporary Hospitality Management, 21(5), 594-609.
16. Khémiri, W., & Noubbigh, H. (2018). Determinants of capital structure: Evidence from sub-Saharan African firms. The Quarterly Review of Economics and Finance 70, 150-159.
17. Kiracı, K., & Aydın, N. (2018). Determinants of Capital Structure: Empirical Evidence from Traditional Airlines. International Journal of Economic and Administrative Studies 21, 173-186.
18. M’ng, J. C. P., Rahman, M., & Sannacy, S. (2017). The determinants of capital structure: Evidence from public listed companies in Malaysia, Singapore and Thailand. Cogent Economics & Finance 5, 1-34.
19. Myers, S.C. (1984). The Capital Structure Puzzle. Journal of Finance, 39(3), 575-592.
20. Rajan, R.G., & Zingales, L. (1995). What Do We Know About Capital Structure? Some Evidence from International Data. Journal of Finance, 50(5), 1421-1460.
21. Shyam-Sunder, L., & Myers, S.C. (1999). Testing Static Tradeoff against Pecking Order Models of Capital Structure. Journal of Financial Economics 51, 219-244.
22. Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. Journal of Finance, 43(1), 1-19.
23. Vijayakumaran, S., & Vijayakumaran, R. (2018). The Determinants of Capital Structure Decisions: Evidence from Chinese Listed Companies. Asian Journal of Finance & Accounting, 10(2), 63-81.
24. Zhang, R., & Kanazaki, Y. (2007). Testing Static Tradeoff against Pecking Order Models of Capital Structure in Japanese Firms. International journal of accounting & information management, 15(1), 24-36.