The capital structure puzzle: Testing the trade off and Pecking order theories-evidence from publicly listed non-financial firms from the Philippines

• Main Authors: Arevalo, Maria Isabella, Luna, Gilbert Edison, Penafiel, Pamela Marie, Perlas, Janel
• Format: text
• Language: English
• Published: Animo Repository 2011
• Subjects: Financial institutions > Management; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/18482
• Institution: De La Salle University

This paper tested the two competing capital structure theories, namely the Pecking order theory and the static trade-off theory, to be able to determine the financing behavior of Philippine companies. The authors used an annual panel data covering the years 2004, 2010 composing of publicly listed non-financial firms in the Philippines. Results showed that financing deficit is a significant reason for firms to issue debt. Adjusting towards a targeted debt level also proved to be a reason for debt issuance. Analysis of the recent global financial crisis yielded significant adjustments on the industries financing behavior, as companies try to decrease debt issuances during the crisis to fund their deficits and adjust at a slower pace with regards to their targeted debt level. Conventional leverage testing showed that a firm's tangibility, as represented by the amount of fixed assets, is one of the factors that drive debt issuances. The two theories are not mutually exclusive, considering the Philippine Stock Exchange in general. Both Pecking order and trade-off adjustment behaviors were seen in non-financial publicly listed firms as a whole. However, industry analyses shows that both the holding firms and services sector favor the trade-off theory, while properties, industrial, mining and oil favor Pecking order.