Pecking Order and Trade - off Capital Structure Theories in the European Countries Supported by European Stability Mechanism

Georgios Chatzinas, Maria Markopoulou and Simeon Papadopoulos
Additional contact information
Georgios Chatzinas: PhD Candidate of the Department of Accounting - Finance University of Macedonia, Greece

European Journal of Economics and Business Studies Articles, 2018, vol. 4

Abstract: The financial assistance provided by European Stability Mechanism during the recent European crisis was accompanied with severe austerity measures and strict reforms that changed significantly the economic environment in the countries that accepted it. The present study examines whether these changes affected the capital structure of the European firms in these countries. Using accounting data for firms in Cyprus, Greece, Ireland and Portugal, the researchers created a balanced panel database and applied the Shyam-Sunders and Myers (1999) methodology to investigate whether pecking order or trade-off hypotheses can better explain the financing decision of the firms in these countries during the period before and after the outset of the ESM financial assistance. The results indicate that the firms’ capital structure decisions are explained by both theories in Greece, Cyprus and Portugal before the beginning of the EMS program, while only by trade-off in Ireland. On the other hand, after the beginning of the ESM program the firms’ capital structures are better explained by trade-off hypothesis in Greece and Cyprus, while nothing changed in cases of Ireland and Portugal. The fact that Greek and Cypriot tax rates increased the most among the four examined countries may explain at least partially the above differentiations. So, the economic environment is a primary factor that affects the explanatory power of each capital structure theory. Moreover, a change in economic environment may lead to a change in the dominant capital structure theory.

Keywords: Capital Structure; Trade-Off; Pecking Order; Cyprus; Greece; Ireland; Portugal; European Stability Mechanism (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://brucol.be/index.php/ejes/article/view/5467 (text/html)
https://brucol.be/files/articles/ejes_v4_i3_18/Chatzinas.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eur:ejesjr:236

DOI: 10.2478/ejes-2018-0057

Access Statistics for this article

More articles in European Journal of Economics and Business Studies Articles from Revistia Research and Publishing
Bibliographic data for series maintained by Revistia Research and Publishing ().