An Empirical Study about the Pecking Order Theory

The Wall Street Journal April 28, 2009 reported market concern about sticky leverage. During the credit crunch of 2008, corporate leverage rose at a faster rate than it did at the peak of the economic boom, even as firms worked hard to reduce borrowing. It proved a significant concern for firms where deleveraging should be the top priority. This problem begs the question of how firms make financing choices in the first place. This paper uses Myers ’ Pecking Order Theory to examine 250 Pennsylvania companies during the period of 1988 – 2007. Our empirical results support Myers ’ Pecking Order Theory. The study provides additional empirical support for the Pecking Order Theory while avoiding potential problems of varying state-level tax and regulatory environments