Tests of the Pecking Order Theory and the Firm Life Cycle

We examine the central prediction of the pecking order theory of financing among firms in two distinct life cycle stages, namely growth and maturity. In general, we find that firms in both stages follow the pecking order. More specifically, we find that within a life cycle stage and after sufficiently controlling for debt capacity constraints across several dimensions, firms with high adverse selection costs follow the pecking order more closely, as the theory predicts. We further show that certain determinants of debt capacity are specific to each life cycle stage, and cannot simply be generalized across a broad sample of firms. Our results highlight how intertwined firm financing decisions are with its life cycle and that one size does not fit all with regards to firm financial policy.