Testing a Dynamic Nature of Pecking Order Theory of Financing with Incremental Measures

This paper tests the validity of pecking order theory by Myers Majluf(1984) on Korean manufacturing firms continuously listed in the KRX for the years of 1981 to 2004. We construct sub-samples according to the occasion of Korean financial crisis, the magnitude of q-ratio, and firm size. Our research documents that pecking order theory is supported by some variables, and not by others. The theory is accepted or rejected according to sub-periods or sub-samples. Our research shows that a dynamic interpretation of pecking order theory can be quite different from the traditional static interpretation, and thus it requires a new point of view. Change of cash and cash equivalent and change of physical assets among total assets significantly rejects pecking order theory consistently in all kinds of samples. Change of cash flow significantly supports the theory in the post-crisis period, for firms with value-maximizing behavior, and for slow growing firms. Change of cash flow, however, significantly rejects the theory in the pre-crisis period and for firms with non-value-maximizing behavior. Change of profitability significantly supports the theory in the post-crisis period and for slow growing firms. Change of profitability significantly rejects the theory in the pre-crisis period and for fast growing firms. Change of non-debt tax shields significantly supports the theory in the pre-crisis period and for firms with non-value-maximizing behavior. But non-debt tax shields significantly rejects the theory in the post-crisis period and for firms with value-maximizing behavior.