Pecking Order Theory and the financial structure of manufacturing SMEs from Australia's Business Longitudinal Survey
The principal objective in this paper is to ascertain the extent to which Myers' (1984) Pecking Order Theory (POT) of business financing appears to explain financial structure amongst a panel of 871 manufacturing SMEs legally organised as proprietary companies, taken from the Australian federal government's Business Longitudinal Survey for three financial years from 1995-96 to 1997-98.
The research findings reported in the paper provide further substantial empirical evidence broadly suggesting pecking order financing behaviour amongst SMEs. However, the findings also suggest the need for a modified POT that more fully reflects the special circumstances and nuances of SME financing. A full specification for a modified POT of financing for SMEs is proposed as a basis for further inquiry in the area.
Lamberts BRS Financial Planning Pty Ltd
Richard G P McMahon
Flinders University of South Australia, Adelaide SA
Agarwal, N.C., 1979, On the Interchangeability of Size Measures, Academy of Management Journal 22 (2), pp. 404-409.
Aldrich, J.H. and Nelson, F.D., 1984, Linear Probability, Logit, and Probit Models, Sage Publications: Beverly Hills, California.
Allen, D.E., 1993, The Pecking Order Hypothesis: Australian Evidence, Applied Financial Economics, 3 (2), pp. 101-112.
Ang, J.S., 1991, Small Business Uniqueness and the Theory of Financial Management, Journal of Small Business Finance, 1 (1), pp. 1-13.
Ang, J.S., Cole, R.A. and Lin, J.W., 2000, Agency Costs and Ownership Structure, The Journal of Finance, 55 (1), pp. 81-106.
Australian Bureau of Statistics, 1996, Small Business in Australia 1995, Australian Government Publishing Service: Canberra, Australian Capital Territory.
Bopaiah, C, 1998, Availability of Credit to Family Businesses, Small Business Economics, 11 (1), pp. 75-86.
Chiarella, C, Pham, T.M., Sim, A.B. and Tan, M., 1992, Determinants of Corporate Capital Structure: Australian Evidence, in G. Rhee and R. Change eds Pacific-Basin Capital Markets Research, vol. 3, Elsevier Science Publishers B.V.: The Netherlands, pp. 139-158.
Chittenden, F., Hall, G. and Hutchinson, P., 1996, Small Firm Growth, Access to Capital Markets and Financial Structure: Review of Issues and an Empirical Investigation, Small Business Economics, 8 (1), pp. 59-67.
Constand, R.L., Osteryoung, J.S. and Nast, D.A., 1991, Asset-Based Financing and the Determinants of Capital Structure in the Small Firm, in R. Yazdipour ed. Advances in Small Business Finance, Kluwer Academic Publishers: Boston, Massachusetts, pp. 29-46.
Cosh, A. and Hughes, A., 1994, Size, Financial Structure and Profitability: UK Companies in the 1980s, in A. Hughes and D.J. Storey eds Finance and the Small Firm, Routledge: London, England, pp. 18-63.
Fama, E.F. and French, K.R., 2000, Testing Tradeoff and Pecking Order Predictions About Dividends and Debt, Working Paper No. 505, the Center for Research in Security Prices, Graduate School of Business, University of Chicago, Chicago, Illinois.
Graham, J.R. and Harvey, C.R., 2001, The Theory and Practice of Corporate Finance: Evidence From the Field, Journal of Financial Economics, 60 (2-3), pp. 187-243.
Hair, J.F., Anderson, R.E., Tatham, R.L. and Black, W.C., 1995, Multivariate Data Analysis, 4th edn, Prentice-Hall: Englewood Cliffs, New Jersey.
Hall, G., Hutchinson, P. and Michaelas, N., 2000, Industry Effects on the Determinants of Unquoted SMEs' Capital Structure, International Journal of the Economics of Business, 7 (3), pp. 297-312.
Holmes, S. and Kent, P., 1991, An Empirical Analysis of the Financial Structure of Small and Large Australian Manufacturing Enterprises, Journal of Small Business Finance, 1 (2), pp. 141-154.
Hutchinson, P., Hall, G. and Michaelas, N., 1998, The Determinants of Capital Structure for Micro, Small and Medium-Sized Enterprises, Proceedings of the 43rd Annual World Conference of the International Council for Small Business, Nanyang Technological University, Singapore, pp. 1-9.
Jensen, M.C. and Meckling, W.H., 1976, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, 3 (4), pp. 305-360.
Jordan, J., Lowe, J. and Taylor, P., 1998, Strategy and Financial Policy in UK Small Firms, Journal of Business Finance and Accounting, 25 (1-2), pp. 1-27.
Kotey, B., 1999, Debt Financing and Factors Internal to Business, International Small Business Journal, 17(3), pp. 11-29.
Levin, R.I. and Travis, V.R., 1987, Small Business Finance: What the Books Don't Say, Harvard Business Review, 65 (6), pp. 30-32.
McMahon, R.G.P., 2001, Equity Agency Costs Amongst Manufacturing SMEs from Australia's Business Longitudinal Survey, Research Paper Series No. 01-7, School of Commerce, The Flinders University of South Australia, Bedford Park, South Australia.
McMahon, R.G.P., forthcoming, Equity Agency Costs Amongst Manufacturing SMEs From Australia's Business Longitudinal Survey, Small Business Economics.
McMahon, R.G.P., Holmes, S., Hutchinson, P.J. and Forsaith, D.M., 1993, Small Enterprise Financial Management: Theory and Practice, Harcourt Brace: Sydney, New South Wales.
Michaelas, N., Chittenden, F. and Poutziouris, P., 1999, Financial Policy and Capital Structure Choice in U.K. SMEs: Empirical Evidence from Company Panel Data, Small Business Economics, 12 (2), pp. 113-130.
Myers, S.C., 1984, The Capital Structure Puzzle, The Journal of Finance, 39 (3), pp. 575-592.
Myers, S.C. and Majluf, N.S., 1984, Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not, Journal of Financial Economics, 13 (2), pp. 187-221.
Norton, E., 1991, Capital Structure and Small Public Firms, Journal of Business Venturing, 6 (4), pp. 287-303.
Pettit, R.R. and Singer, R.F., 1985, Small Business Finance: A Research Agenda, Financial Management, 14 (3), pp. 47-60.
Romano, C.A., Tanewski, G.A. and Smyrnois, K.X., 2001, Capital Structure Decision Making: A Model for Family Business, Journal of Business Venturing, 16 (3), pp. 285-310.
Scherr, F.C. and Hulburt, H.M., 2001, The Debt Maturity Structure of Small Firms, Financial Management, 30 (1), pp. 85-111.
Scherr, F.C, Sugrue, T.F. and Ward, J.B., 1990, Financing the Small Firm Start-Up: Determinants of Debt Use, paper to the 2nd Annual Small Firm Financial Research Symposium, California State University, Fresno, California.
Scherr, F.C, Sugrue, T.F. and Ward, J.B., 1990, Financing the Small Firm Start-Up: Determinants of Debt Use, Journal of Small Business Finance, 3 (2), pp. 17-36.
Van der Wijst, D. and Thurik, R., 1993, Determinants of Small Firm Debt Ratios: An Analysis of Retail Panel Data, Small Business Economics, 5(1), pp. 55-65.
Vos, E. and Forlong, C, 1996, The Agency Advantage of Debt Over the Lifecycle of the Firm, Entrepreneurial and Small Business Finance, 5 (3), pp. 139-211.
PP: 023 - 042