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- Title
Large Investments, Financial Constraint and Capital Structure.
- Authors
KHIEU, HINH D.; CHEN, MANFEN W.; PYLES, MARK K.
- Abstract
We examine the choice of capital structure for large-scale investments, contingent upon high or low degrees of financial constraint. Traditional pecking theory suggests the most desired financing source order is internal capital, debt and lastly, equity. We find, however, that financially constrained firms funding abnormally large investments primarily use equity and relatively little internal capital pools or debt. Such a financing pattern holds even when constrained firms have larger cash balances and higher debt capacity. Thus, for financially constrained firms in our manufacturing sample, our findings do not support pecking order theory. We further find equity financing in such instances value-decreasing for shareholders.
- Subjects
CAPITAL structure; STOCKS (Finance); INVESTMENTS; SOCIAL hierarchy in animals; DEBT
- Publication
Quarterly Journal of Finance & Accounting, 2014, Vol 51, Issue 3/4, p71
- ISSN
1939-8123
- Publication type
Article
- DOI
10.2307/qjfinacct.51.3-4.71