Review article
TRADE-OFF THEORY VS. PECKING ORDER THEORY – EMPIRICAL EVIDENCE FROM THE BALTIC COUNTRIES
Irina Berzkalne
; University of Latvia, Latvia
Elvira Zelgalve
; University of Latvia, Latvia
Abstract
Capital structure is of particular importance in estimating the company value; an accurately estimated
and selected equity and debt ratio can maximize the company value and minimizes the cost of capital;
therefore, this issue is especially significant in the changing conditions of economic development. The
main purpose of this study is to simultaneously evaluate the pecking order and trade-off theories of
capital structure and determine which one performs better for a sample of companies from the Baltic
states. Analysis is conducted on a sample of 75 listed companies (Baltic Stock Exchange) over the period
from 1998 to 2011. The authors test theories using panel data and regression analysis. The empirical
results show that listed companies in Latvia, compared to the other countries, can be characterized by
the lowest debt ratio, however an increase in the average debt ratio can be observed, therefore the gap
has been reduced in the recent years. The study did not find evidence supporting pecking order theory,
but results show that companies adjust their debt levels according to target debt.
Keywords
Capital structure; Debt ratio; Leverage; Pecking order theory; Trade-off theory
Hrčak ID:
128524
URI
Publication date:
1.3.2014.
Visits: 2.084 *