Testing the pecking order theory of capital structure in Canadian firms

Abstract

The purpose of the study is to explore the validity of the Pecking Order Theory in Canadian firms. My model followed the work of Shyam-Sunder and Myers (1999) and Frank and Goyal (2002), and I run the regression on new debt issued and the aggregated deficit of the firm, its components and new debt issued. Dummy variables were included to spot any differential financial pattern in Canadian firms. The sample size was 120. All firms were listed on the Toronto Stock Exchange in 2012. From the results, it is shown that firms mainly prefer debt after considering the internal sources of fund. The dividend payments and net working capital requirements are not the major concern to raise funds, but rather the investment needs and the cash flows from operations play key roles for external funding. And it is not significantly different across industries.