Abstract

The pecking order hypothesis predicts that equity costs exceed debt costs when managers require outside funding. Asymmetric information costs motivates this hypothesis. I use an econometric model to estimate issuance costs managers face to test the prediction and motivation of the pecking order. The estimates challenge the existence of a pecking order. First, debt costs increase from about 50 % of equity costs in 1973 to 140 % of equity costs in 2002. Second, information asymmetry does not appear to increase managers’ reliance on debt relative to equity, although information asymmetry costs are clearly present in debt and equity individually.

Citations