Does Pecking Order Theory Apply to Firms in Brazil and the Pacific Alliance

Abstract

The purpose of this study is to test the application of pecking order theory (POT) to companies operating in Brazil and the countries that form the Pacific Alliance (Mexico, Chile, Peru, and Colombia). In order to do this, the methodology chosen is the one developed by Frank and Goyal, which aims to check if the company’s capital structure follows a specific hierarchy based on capital cost. The sample consists of 255 listed companies operating in Brazil and 346 listed companies operating in Pacific Alliance countries between 2010 and 2016. The applied method is a pooled panel data regression model The results point out that the mentioned theory is more applicable to major corporations in Brazil but as well as to small firms in the Pacific Alliance countries. These findings are obtained based on the statistical significance of capital structure determinant market-to-book value ratio, for Brazilian companies, and at tangibility and profitability, in the case of Pacific Alliance companies.