Track: Financial Engineering

Abstract

This paper tests the pecking order model. The Peking order theory of capital structure was first introduced by Donaldson (1961) and then it was revised by Stewart C. Mayers and Nicolas Majluf (1984). In the pecking order theory of capital structure, it is assumed that there is no optimum debt ratio; instead it states that in case of financial deficit, the firm should borrow and only when issuing more debt is not advisable, the firm will issue stock. Since then many researchers had investigated the Pecking Order theory and got different results. This paper investigates the validity of this model very precisely by applying strict restrictions to the sample to eliminate any interrupting factor.

Sample is chosen from the Bursa Malaysia listed companies. The validity of pecking order model is investigated based on both current and anticipated deficiency.  It is been shown that this theory responses to anticipated deficiency far better than current deficiency.