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“Testing Pecking Order Behaviors from the Viewpoint of Multinational and Domestic Corporations” “Testing pecking order behaviors from the viewpoint of multinational and domestic corporations” Chuan-Hao Hsu AUTHORS Yi-Chein Chiang Tung Liang Liao Chuan-Hao Hsu, Yi-Chein Chiang and Tung Liang Liao (2013). Testing pecking ARTICLE INFO order behaviors from the viewpoint of multinational and domestic corporations. Investment Management and Financial Innovations, 10(2-1) RELEASED ON Thursday, 01 August 2013 JOURNAL "Investment Management and Financial Innovations" FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 0 0 0 © The author(s) 2021. This publication is an open access article. businessperspectives.org Investment Management and Financial Innovations, Volume 10, Issue 2, 2013 Chuan-Hao Hsu (Taiwan), Yi-Chein Chiang (Taiwan), Tung Liang Liao (Taiwan) Testing pecking order behaviors from the viewpoint of multinational and domestic corporations Abstract This study is the first to investigate the well-known pecking order behaviors from the viewpoint of internationalization. This study’s results show that the financing behaviors of the US firms are consistent with the pecking order theory to some extent. In addition, the pecking order theory applies more to multinational corporations (MNCs) than domestic corporations (DCs). The results from curvilinear regression models demonstrate a concave relationship between net debt issues and financing deficits for both MNCs and DCs, indicating that firms finance their deficits with debts first and issue equities only when they reach their debt capacity. Still, the pecking order effects are larger for MNCs than DCs. Keywords: pecking order theory, internationalization, curvilinear regression model. JEL Classification: F23, G32. Introduction optimism could induce the pecking order preference. Seifert and Gonenc (2008) tested how well the pecking The pecking order theory (Myers, 1984; Myers and order theory applied to firms in the US, the UK, Majliuf, 1984) is one of the most well-known German and Japan. Results gave evidence for Japanese theories of a firm’s capital structure. The theory firms but little support for the US, the UK, and describes a hierarchy of financing choices that a German firms. Seifert and Gonenc (2010) found little firm makes due to information asymmetry. The support for the pecking order theory in 23 emerging pecking order theory posits that managers prefer countries. Lemmon and Zender (2010) demonstrated a internal financing to external financing, and if concave relationship between change in debt and internal funds are inadequate, debt financing is financing deficits, and solved a problem raised by preferred to equity financing. Chirinko and Singha (2000) that firms may be Shyam-Sunder and Myers (1999) was the first study constrained by concerns over debt capacity. Bulan and to test the pecking order theory. The authors’ idea Yan (2010) demonstrated that the pecking order theory was that debt financing is used to fill the internal described the financing behavior of mature firms better financing gap, which is constructed from aggregating than growth firms. dividends, investment and change in working capital The issue of investigating pecking order behavior minus internal cash flows. They found strong from the viewpoint of internationalization has support for the pecking order theory among a always been ignored despite the fact that many US sample of 157 firms that had traded continuously firms have expanded their operations abroad during the period from 1971 to 1989. Using the substantially. Firms may choose to diversify same idea and model, some studies that followed internationally for many reasons, including increasing have provided mixed evidence of this view. Frank profits and creating market share. International firms and Goyal (2003) analyzed US listed companies generally have several geographical segments located from 1971 to 1998 but did not find support for the in different reporting jurisdictions. Kogut (1983) pecking order theory, especially for small, high- argued that geographic diversification increases the growth firms. Ngugi (2008) used 22 firms operating operational flexibility of multinational corporations in Kenya from 1991 to 1999 to test the pecking (MNCs) and allows firms to increase value by order theory. They found better support for the exploiting the additional uncertainty of the pecking order than the trade-off theory when a J-test international environment. On the other hand, by is applied. Ni and Yu (2008) used companies listed running a global firm, MNC managers may also derive in China in 2004, and their results showed that only private benefits, including prestige or better career the large companies in the sample followed a prospects, higher pay, and opportunities for pecking order, whereas small- and medium-sized entrenchment as they become more valuable to a more companies did not. Lin, Hu and Chen (2008) used complex firm (Reeb, Mansi and Allee, 2001). From an Taiwan listed firms and found that managerial information perspective, international diversification may increase information-processing costs due to stakeholders’ unfamiliarity with international opera- Chuan-Hao Hsu, Yi-Chein Chiang, Tung Liang Liao, 2013. ting environments, among other factors (Goldberg Chuan-Hao Hsu, Ph.D. Student of Ph.D. program in Business, Feng Chia University, Taiwan. and Heflin, 1995; Reeb, Kwok and Baek, 1998; Yi-Chein Chiang (corresponding author), Professor of International Duru and Reeb, 2002). Wright, Madura and Wiant Trade Department, Feng Chia University, Taiwan. (2002) and Doukas and Pantzalis (2003) attribute Tung Liang Liao, Professor of Department of Finance, Feng Chia University, Taiwan higher agency costs in MNCs to the higher level of 158 Investment Management and Financial Innovations, Volume 10, Issue 2, 2013 information asymmetry that arises when MNCs (2003). Results from the curvilinear regression model diversify geographically. Duru and Reeb (2002) demonstrate a concave relationship between net debt found that analysts’ forecasts became less accurate issues and financing deficits for both MNCs and as operations became more diversified geographically, DCs, indicating that firms finance their deficits with which is consistent with the presence of a more debts first and issue equities only when they reach significant level of information asymmetry between their debt capacity. Still, the pecking order effects are MNCs and the analysts. Chiang and Ko (2009) higher for MNCs than DCs. Our results shed light on provided evidence that lower frequencies of how internationalization influences pecking order consolidated financial statements also increased behaviors and improves our understanding of firms’ information asymmetries, particularly for MNCs. financing policies when they expand internationally. Internationally diversified firms create a more The present study is structured as follows. Section 1 complex information environment, and investors describes the data and variables. Section 2 provides generally are more informed about a firm’s domestic the methodology, followed by empirical results and operations than about its foreign operations. Precisely discussion in section 3. The final section concludes because information is asymmetrical, external the paper. financing is more costly than internal free cash flows 1. Data and variables of investments. Alternatively, more information The data consist of all US firms in the Compustat could be available for MNCs, because they are 1 usually larger than domestic firms. Lee, Mande and databases for the period of 1991-2009 . We exclude Son (2008) demonstrated that MNCs released their financial firms (Standard Industrial Classification earnings reports earlier than domestic corporations [SIC] codes 6000-6999) and utilities (SIC codes 4900- (DCs). Other literature, such as Gray, Meek and 4999) to avoid the fact that their capital structures are Roberts (1995), Hossain, Perera and Rahman regulated. In line with previous capital structure (1995), Khanna, Palepu and Srinivasan (2004), and studies, all variables are winsorized at their upper and Cahan, Rahman and Perera (2005) provided lower 0.5% to mitigate the impact of outliers. evidence that the level of voluntary disclosure is Following Lee (1986), Lee and Kwok (1988), and positively related to a company’s extent of global Burgman (1996), the present study mainly uses the operations and reduces information problems. Thus, foreign tax ratio (FTTT) to measure international- it is not clear if information asymmetry problems lization2. This variable is available directly from are so severe among MNCs and thus have some Compustat and allows the largest sample to be impact on a firm’s financing policies such as constructed. Firms are classified as purely DCs if their pecking order behavior. To date, the corresponding foreign tax ratio equals zero. Likewise, MNCs are tests have not yet been explored. defined as firms whose foreign tax ratios are greater The international expansion of firms provides an than 10%. For comparison and robustness, we also use the foreign pre-tax income (FITI) as the other proxy interesting setting to explore the impact on pecking 3 order behaviors. In this study, we divide firms into for a company’s degree of international involvement . MNCs and DCs to compare how well the pecking Using the flow of funds data, we follow Frank and order theory applies to these two types of firms. We Goyal (2003) and calculate financing deficit (DEF) also use
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