Validating the Pecking Order Theory in the Nigerian Deposit Money Banks

Abstract

It is impossible to overstate the significance of integrating debt and equity financing decisions in enhancing and maintaining corporate performance. Conflicting predictions and arguments on whether capital structure promotes or hinders a firm's success are provided by capital structure theories. Since Myer (1984) created the pecking order theory and empirically tested it as a replacement for the trade-off theory in response to the harsh criticism and restrictions of Miller and Modigliani's (1958) capital structure theory. Numerous researches have been conducted in both developed and emerging economies, making a substantial contribution to the discussion and yielding contradictory results. There aren't many studies conducted in Nigeria that used a reliable approach like the Generalized Method of Moments (GMM) to examine the viability of the pecking order theory in the banking industry. Against this background this study examines the pecking order theory of capital structure of deposit money banks listed on the Nigerian bourse, on a panel data set; of twelve (12) banks spanning through 2010 to 2019. The System GMM methodology within static panel was adopted. Findings revealed all the variables considered conform to A priori expectations. Specifically, profitability (ROA) and firm size (FSIZE) have significant negative relationship with capital structure at 5% confidence level. Firm’s age and asset tangibility positively and significantly impact capital structure during the period under review. Finally, growth opportunity has a non-significant positive relationship with capital structure of DMBs in Nigeria during the period. The study concludes that financing decision of DMBs follow hierarchy need of which occupied first order determinant in their financing behavior in Nigeria. Thus, the applicability of the pecking order theory in capital structure decision in the Nigerian DMBs is valid and strongly followed.

Keywords: Pecking Order Theory, Capital Structure, DMBs, Trade-off Theory, Financing