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RELATIONSHIP BETWEEN THE PECKING ORDER THEORY AND FIRM’S AGE: EMPIRICAL EVIDENCES FROM INDIA

Age is a significant factor of a firm’s life cycle. The present study examines whether a firm’s financing hierarchy (suggested by the pecking order theory) is affected by the firm’s age. We focus primarily on three stages of age, namely, young, middle and old. Extending Shyam-Sunder and Myers’ (1999) model, firms have been divided into deficit and surplus groups. Under deficit and surplus situations, the results are tested more rigorously for firms that raised/redeemed only debt, only equity and both. A data set of Bombay Stock Exchange (BSE) 500 Index firms covering a time span of 12 years (2003-2014) has been used in the study. To test the pecking order, ordinary least square (OLS) regression has been used.

The empirical findings indicate that in a deficit situation, old firms, in general, have stronger adherence to the pecking order hypothesis (POH) than young and middle age firms. Firms, across all age groups, that issued only debt, have raised debt more than their deficits due to their debt ratios being on the safer side, thus following the pecking order. However, the pecking order fails for young and middle age firms that raised only equity in spite of existing low debt ratios. The pecking order seems to be followed among firms (from all age groups) that raised both debt and equity; the results are highly robust for old firms.

In surplus conditions, old age firms, being mature and stable, do not have large financing requirements and have been observed to pay back more debt by using their surpluses; the results are extremely poor for young and middle age surplus firms. When firms redeem only debt, old age firms seem to have large preference to follow POH, followed by middle age firms. These excessive redemptions are supported by new debt issues. Young firms redeem debt comparatively less as they have stronger preference to save funds for the future. Middle age firms seem to have huge debt redemptions vis-a-vis young and old firms.