Testing the pecking order theory of deficit and surplus firms: Indian evidence

Abstract

Purpose

The purpose of this paper is to test whether Indian firms follow the pecking order theory under situations of deficiency as well as surplus.

Design/methodology/approach

The study examines Indian firms included in the Bombay Stock Exchange (BSE) 500 index, covering a time span of ten years (2003-2012). An extended model of pecking order theory is tested for deficit and surplus firms separately. The authors use ordinary least square regressions to test the results.

Findings

The findings indicate that the pecking order theory is an excellent descriptor for deficit firms, but a poor one for surplus firms. Deficit firms frequently issue debt to fill up deficiency requirements but keep their debt ratios in limit. In marked contrast, surplus firms have low debt to equity ratios and only occasionally redeem debt. They tend to retain funds for future expansion and other operational needs.

Research limitations/implications

The study is limited to firms included in the BSE 500 index, but could be extended to others. Future research work could also focus on debt sub-components.

Practical implications

The present study is useful for firms that are considering capital structure decisions and supports finding that deficit and surplus firms behave differently.

Originality/value

This is the first study separately testing the pecking order between deficit and surplus firms in an emerging market.

Citation

Bhama, V., Jain, P.K. and Yadav, S.S. (2016), "Testing the pecking order theory of deficit and surplus firms: Indian evidence", International Journal of Managerial Finance, Vol. 12 No. 3, pp. 335-350. https://doi.org/10.1108/IJMF-06-2014-0095