Ordering the Preference Hierarchies for Internal Finance, Bank Loans, Bond and Share Issues

We estimate the incremental financing decision for a sample of some 150 Dutch companies for the years 1984 through 1997, thereby distinguishing internal finance and three types of external finance: bank borrowing, bond issues and share issues. First, we estimate a multinomial logit model which confirms several predictions of both the static trade-off theory and the pecking-order theory as to the determinants of financing choices. Next, we use ordered probit models to determine which financing hierarchy fits the data best. The results suggest that Dutch firms have a most-preferred financing hierarchy: (i) internal finance, (ii) bank loans, (iii) share issues, (iv) bonds issues.