A rational justification model of the pecking order hypothesis to the capital structure formulation | |
| Author | Vuong Duc Hoang Quan |
| Call Number | AIT DISS. no. SM-03-01 |
| Subject(s) | Capital--Mathematical models Justification |
| Note | A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy |
| Publisher | Asian Institute of Technology |
| Abstract | Initiated by Myers and Maj luf (1984) and Myers (1984) as a solution to minimize the costs of asymmetric information between insiders and outside investors, the pecking order theory has turned out to be a spotlight in the recent trend of shifting from the traditional static trade-off optimal model to other theories as an effort to look for an explanation to corporate capital structure behavior. This study tries to develop a rational justification model to the pecking order hypothesis to the capital structure formulation. The tendency to prefer to resort to debt rather than equity securities in satisfying the funding needs for investment opportunities is influenced by the firm 's management incentive to reduce the negative impact on its share price, but it is not alone decisive. Our study asserts this tendency can be explained as the result of a trading-off process of seven different factors. In details, they include the firm's management incentives: (i) to maximize the taxation gains, (ii) to give positive signals to the public about the firm 's situation, (iii) to minimize the negative impact on the firm's share price, (iv) to minimize transaction costs involving with the securities issuance, (v) to minimize the possible risks enduring by the current shareholder~ as well as the incumbent management team such as a dilution in voting control and negative impacts of a takeover, (iv) to maximize the benefits of current shareholders by choosing in high-risk, high-return investment opp01tunties, and (vii) to minimize the losses associated with possible bankruptcy, Given the assumption that a business will continue for an indefinitely long-period of time unless there is good evidence to the contrary, the cumulative effects of the first five generally exceeds those of the rest two. In short, this study contributes to the literature of capital structure in three aspects. Theoretically, the contribution of this study includes the determination of the relationship between the pecking order hypothesis and the paradoxical ModiglianiMiller proposition I in the light of various existing theoretical hypothesis. By identifying this relationship, a rational justification model to the pecking order hypothesis to the corporate capital structure formulation and a conceptual framework that allows for empirically testing this justification model were then developed. Besides, to provide a support to the proposed model, two empirical tests with the target groups of Thai and French listed industrial companies were also conducted. Methodologically, the study uses the approach of Analytical Hierarchy Process (AHP). The AHP approach provides a way to avoid the measurement problems encountered by using proxies in previous empirical studies. The direct measurement of managerial considerations also opens an opportunity to compare the financing behaviors between different countries without the burden of accounting adjustments. Empirically, the findings of the surveys on the decision making of the Thai and French industrial listed firms in face of the task of raising funds needed are in favor of the prediction of a preference of external debt to external equity in terms of a sources of financing of the pecking order hypothesis.This study also includes an examination of the financing behaviors conducted by Thai and French industrial listed firms. In order to conduct the examination, a framework of analysis that consists of five related issues, which include the considerations and predispositions taken by the management in making choices of sources of financing in facing investment opportunities, is proposed. The findings shows that, in general, there were more similarities between the Thai and French company respondents than differences as far as their financing behaviors are concerned. They appeared to prefer debt than equity as a source of funding, and their behaviors were strongly influenced by an aversion against dilution effects. The most significant difference between these managers of the two countries was probably a more prudent attitude of the French respondents towards investment opportunities as compared to their Thai counterparts. |
| Year | 2003 |
| Type | Dissertation |
| School | School of Management (SOM) |
| Department | Other Field of Studies (No Department) |
| Academic Program/FoS | Master of Business Administration (MBA) (Publication code=SM) |
| Chairperson(s) | Johri, Lalit M.;Gupta, Jyoti P. |
| Examination Committee(s) | Paul, Himangshu;Khang, Do Ba;Haddawy, Peter |
| Scholarship Donor(s) | Government of Austria |
| Degree | Thesis (Ph.D.) - Asian Institute of Technology, 2003 |