Revisiting the pecking order theory: insights from an emerging market economy

Islam Abdeljawad () and Mohammad Nasser Jaradat
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Islam Abdeljawad: An-Najah National University
Mohammad Nasser Jaradat: An-Najah National University

International Review of Economics, 2025, vol. 72, issue 2, No 20, 23 pages

Abstract: Abstract This study tests the explanatory power of the pecking order theory (POT) in shaping the financing decisions of non-financial firms listed on the Palestine Exchange (PEX), an under-researched, politically unstable emerging market. Using panel data for 29 firms over the period 2005–2019, we examine whether debt issuance is primarily driven by financial deficits and whether this relationship outweighs the influence of conventional capital structure determinants. Three empirical models are estimated: (1) testing the direct link between net debt issuance and financial deficit; (2) assessing whether financial deficit crowds out the explanatory power of firm-specific variables; and (3) examining leverage determinants consistent with POT predictions. Panel least squares serves as the primary estimation method, with robustness confirmed through fixed effects, random effects, lagged specifications, and GMM system estimations. The results strongly support POT in the Palestinian context. Financial deficit emerges as the dominant driver of debt issuance, with the coefficients of profitability, size, and asset tangibility declining once the deficit is included. Leverage regressions further reveal that profitability and growth opportunities are negatively associated with leverage, while firm size and tangibility exert positive effects, in line with POT predictions. These findings underscore the reliance on internal financing and bank debt in environments characterized by political instability, shallow equity markets, and high information asymmetry. The study contributes to the capital structure literature by offering context-specific evidence on POT in a politically fragile, bank-dependent economy. It also provides practical implications for policymakers, highlighting the need to strengthen equity market infrastructure, improve investor protection, and reduce information asymmetries to broaden financing options. Future research could extend this framework to sectoral analyses or cross-country comparisons within politically unstable emerging markets.

Keywords: Pecking order theory; Financing deficit; Leverage; Capital structure (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s12232-025-00509-7

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