Empirical evidence on the existence of a pecking order: a study about whether the pecking order theory is an accurate means to describe the incremental financing practices by firms in the European Union

Abstract: The objective of this research paper is to establish to which extent the pecking order theory of capital structure is empirically justified. It is a test of the pecking order theory among publicly-listed firms in the European Union. The pecking-order model as proposed by Shyam-Sunder and Myers (1999) is followed. Multiple tests are conducted, including a test where a possible time gap between the financing deficit and debt issuance is taken into account. Furthermore, companies were divided size into various categories based on firm size and nationality to further evaluate financing behaviors within the selected data. Following Frank and Goyal (2003), the pecking order theory is also tested against a more traditional model of financing behavior. Pecking order behavior is being investigated before the financial crisis and during the financial crisis. Lastly, all EU-countries in the sample period have been investigated separately. The results show that there is very little evidence in favor of the existence of a pecking order in the incremental financing practices of firms. The evidence suggests that the pecking order theory has little to very little support in any particular country in the European Union. There is little difference in pecking order behavior between firms of with various levels of total assets. Furthermore, there have not been any significant changes in financing