Models and Tests for the Pecking Order Hypothesis

The hypothesis that when firms obtain financing, they prefer internal sources to external sources is known as the pecking order hypothesis. We model firms' financing activities implied by the pecking order hypothesis by a sequential logit model. Then, we propose to test the pecking order hypothesis by testing the null of sequential logit models against the alternative of nested logit models. Applying the proposed methods, we find that the pecking order hypothesis is rejected for Japanese companies. This implies that their financing activities are viewed as a simultaneous comparison -- choice behavior, namely, they compare all available alternative financing methods simultaneously