The Pecking Order, Debt Capacity, and Information Asymmetry Mark T. Leary and Michael R. Roberts* This Version: December 18, 2008 *Leary is from the Finance Department, Johnson Graduate School of Management, Cornell Uni- versity, Ithaca, NY 14853-6201. Email:
[email protected]. Roberts is from the Finance Depart- ment, The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6367. Email: mr-
[email protected]. This study originated as part of an earlier working paper, \Financial Slack and Tests of the Pecking Order's Financing Hierarchy". We are especially grateful to Michael Lemmon for his continuous feedback. We also thank Lincoln Berger, Philip Bond, Michael Brandt, Alon Brav, Omer Brav, Peter DeMarzo, Adlai Fisher, John Graham, Christopher Hennessy, Peter Mackay, An- drew Metrick, Roni Michaely, Nathalie Moyen, Mitchell Petersen, Ilya Strebulaev, Michelle Vosko, Bilge Yilmaz, Jaime Zender, Ian Zuckerman, Je®rey Zwiebel, seminar participants at Cornell University, Uni- versity of California at Berkeley, Duke University, Stanford University, Stockholm School of Economics, The University of North Carolina-Chapel Hill, Utah University, and The University of Pennsylvania, and conference participants at the 2005 Eastern Finance Association meetings, the UBC Summer Fi- nance Conference, and the 2005 HKUST Finance Conference for helpful comments. Roberts gratefully acknowledges ¯nancial support from the Rodney L. White Center and an NYSE Research Fellowship. The Pecking Order, Debt Capacity, and Information Asymmetry Abstract We quantify the empirical relevance of the pecking order hypothesis using a novel empirical model and testing strategy that addresses statistical power concerns with previous tests. While the classi¯catory ability of the pecking order varies signif- icantly depending on whether one interprets the hypothesis in a strict or liberal (e.g., \modi¯ed" pecking order) manner, the pecking order is never able to accu- rately classify more than half of the observed ¯nancing decisions.