Debt, Equity, and the Pecking Order: Evidence from Financing Decisions of Dividend-Paying Firms

Konstantinos Kakouris () and Dimitrios Psychoyios
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Konstantinos Kakouris: Department of Industrial Management and Technology, School of Maritime and Industrial Studies, University of Piraeus, 185 34 Piraeus, Greece
Dimitrios Psychoyios: Department of Industrial Management and Technology, School of Maritime and Industrial Studies, University of Piraeus, 185 34 Piraeus, Greece

IJFS, 2025, vol. 13, issue 3, 1-14

Abstract: This study investigates whether, and to what extent, dividend-paying firms follow pecking order behavior when altering their capital structure. Using a panel of 3173 U.S. firms from 1960 to 2020 (49,424 firm-year observations), we examine four financing activities: equity and debt issuance under a financing deficit, and equity repurchases and debt redemptions under a financing surplus. We find that firms generally follow the pecking order when issuing or redeeming debt but deviate from it when issuing or repurchasing equity. Adherence to the pecking order also varies with issuance and repurchase size. Very large debt issues and redemptions are associated with lower pecking order coefficients, while large equity issues and repurchases are associated with higher pecking order coefficients, although equity coefficients remain below 0.7. Our findings provide novel evidence of how financing choices, along with issuance and repurchase magnitudes, shape pecking order behavior among dividend-paying firms, offering new insights into capital structure literature.

Keywords: pecking order theory; capital structure; debt issuance; equity issuance; debt redemption; equity repurchase; financing deficit; financing surplus; dividends (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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