Pecking Order Behavior in Emerging Markets

Pecking order behavior is a very important financial hypothesis that attempts to explain how capital structure choices are made. Prior empirical evidence has been lukewarm in its support of this behavior. Most of the research has been conducted using samples of American firms. This paper examines the validity of the pecking order hypothesis in emerging market countries. One of the driving forces behind the pecking order hypothesis is that managers have more information about the value of the company than do outside investors. Examining pecking order behavior in emerging markets would seem like an ideal place to find support for the hypothesis because the problems for outside investors are huge. Compared to investors in the US, investors in emerging markets receive less information, the information they do receive is likely to be distorted (managed), and the legal rights they possess are worse than their counterparts in the US. Using a sample of 23 countries, we find no support for this hypothesis. Firms in these countries finance their deficit mainly with equity and issue equity much more often than would be expected under this hypothesis. Contrary to the pecking order hypothesis, firms with major asymmetri