EconPapers    
Economics at your fingertips  
 

The dynamic specification of the modified pecking order theory: Its relevance to Italy

Maria Bontempi ()

Empirical Economics, 2002, vol. 27, issue 1, 22 pages

Abstract: This paper proposes an empirical model for the modified pecking order theory (MPO) in which both trade-off (TO) and pecking order (PO) models are nested. The MPO model is specified as an error-correction mechanism and applied to a vast panel data-set. Unlike previously estimated financial models, it avoids a number of problems: the mis-specification of dynamics, the approximation of the target leverage using the historical mean, the constrained estimation of the free cash flow components in a unique parameter. The MPO model is particularly good at explaining "hybrid" systems (neither market-based nor bank-based) such as the Italian one, in which companies are a mixture of two types: TO-type firms with a long-term optimal debt ratio towards which they converge; PO-type firms for whom the short-term availability of internal funds for investment may interfere with the process of adjustment towards the target leverage. Finally, the MPO model enables us to separately test the individual relevance of each of the restricted ("pure") TO and PO models: results confirm their mis-specification and clearly point towards the excellent empirical performance of the MPO model.

Keywords: Trade-off theory; Pecking-order theory; Free cash-flow hypothesis; Dynamic panel data; Error correction mechanism model. (search for similar items in EconPapers)
JEL-codes: G21 G30 G32 C23 (search for similar items in EconPapers)
Date: 2002-02-19
Note: received: May 2000/Final version received: September 2000
References: Add references at CitEc
Citations: View citations in EconPapers (18) Track citations by RSS feed

Downloads: (external link)
http://link.springer.de/link/service/journals/00181/papers/2027001/20270001.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

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:spr:empeco:v:27:y:2002:i:1:p:1-22

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2020-11-27
Handle: RePEc:spr:empeco:v:27:y:2002:i:1:p:1-22