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The Pecking Order Hypothesis or Static Tradeoff Theory : Research on capital structure based on a U.K. sample

Wang, Zhao (2013) The Pecking Order Hypothesis or Static Tradeoff Theory : Research on capital structure based on a U.K. sample.

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Abstract:This master thesis aims to test two important theories in the field of capital structure, e.g. the pecking order hypothesis and the static tradeoff theory, under the UK setting. Thus the main research question of the thesis is:” Which theory can better explain the UK non-financial firms’ capital structure, the pecking order hypothesis or the static tradeoff theory?” By using the sample of non-financial firms headquartered in the UK during the period from 2006 to 2011, the relationship between financing deficit and long-term debt ratio is investigated in order to test the pecking order hypothesis, and the leverage determinants assumed by the tradeoff theory are used to verify whether the relationships are consistent with the prediction of tradeoff theory. The main conclusion is that the tradeoff theory has much more explanatory power than the pecking order hypothesis in UK firms‟ capital structure. Specifically, debt ratio is negative with non-debt tax-shields and volatility but positive with profitability and tangibility of assets. The negative relation between the change of debt ratio and financing deficit implies that the UK firms do not follow a specific financing hierarchy and it is plausible there is a target debt ratio. UK firms‟ seem to utilize tax-shields effect and they are affected by the costs of financial distress when finance externally. However, to verify whether there is an actual target debt ratio, new models should be adopted in the further study.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/64342
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