Analysis of the Capital Structure of Latin American Companies in Light of Trade-Off and Pecking Order Theories

Jesús Pinillos (), Hugo Macías, Luis Castrillon, Rolando Eslava and Sadan De la Cruz
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Jesús Pinillos: Facultad de Ciencias Económicas, Administrativas y Contables, Universidad Libre, Seccional Cúcuta, Cúcuta 540001, Colombia
Hugo Macías: Facultad de Ciencias Económicas y Administrativas, Universidad de Medellín, Medellín 050026, Colombia
Luis Castrillon: Facultad de Ciencias Económicas y Administrativas, Universidad de Medellín, Medellín 050026, Colombia
Rolando Eslava: Facultad de Ciencias Económicas, Administrativas y Contables, Universidad Libre, Seccional Cúcuta, Cúcuta 540001, Colombia
Sadan De la Cruz: Facultad de Ciencias Económicas y Empresariales, Universidad de Pamplona, Pamplona 530001, Colombia

JRFM, 2025, vol. 18, issue 7, 1-18

Abstract: The study of capital structure is one of the most relevant topics in finance because, despite the various theories that seek to explain it, there is still no consensus on the determining factors or the behaviors of financing decisions in companies. This study empirically analyzes the capital structure decisions of Latin American companies during the period of 2013–2023, in light of trade-off and pecking order theories. A panel data methodology was applied to 62 companies, using fixed and random effects models. The results show that, on average, companies correct around 5.80% of the gap between their current and optimal level of indebtedness per period, partially supporting the trade-off theory. However, the effects of the financial deficit on indebtedness are heterogeneous and, in most cases, inconsistent with the pecking order theory, especially in countries such as Colombia. It is concluded that country risk has a marginal influence on debt decisions, and the need to consider each country’s institutional and market particularities when analyzing the dynamics of capital structure in emerging economies is emphasized.

Keywords: capital structure; trade-off theory; pecking order theory; Latin America; leverage; data panel (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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