Journal of Economics and Business

ISSN 2615-3726 (Online)

ISSN 2621-5667 (Print)

Published: 13 March 2020

Does Pecking Order Theory Hold Among Kenyan Firms?

Douglas M. Wanja, Peter W. Muriu

Kisii University (Kenya), University of Nairobi (Kenya)

Download Full-Text Pdf


Pages: 386-397

Keywords: Pecking Order Theory, Capital structure; Financing deficit, Panel Data


This study examined the pecking order theory of capital structure through annual data of 37 firms listed at the Nairobi Securities Exchange for the period 2011-2016. Estimation results established a positive relationship between changes in debt and investments and a negative relationship between changes in debt and cash flows. Overall, the findings suggest that financial deficits determine net debt issues and hence a strong case for pecking order theory in Kenya in explaining capital structure decisions.


  1. Abdeljawad, I., Nor, F. M., Ibrahim, I., & Abdul, R. (2013). Dynamic Capital Structure Trade-Off Theory : Evidence from Malaysia. International Review of Business Research Papers, 9(6), 102-110
  2. Abor, J. (2007). Corporate Governance and Financing Decisions of Ghanaian Listed Firms. Corporate Governance: The International Journal of Business in Society, 7(1), 83–92.
  3. Abor, J. (2008). Determinants of the Capital Structure of Ghanaian Firms (No. RP_176). Nairobi: African Economic Research Consortium.
  4. Abor, J., & Biekpe, N. (2005). What Determines The Capital Structure Of Listed Firms In Ghana? African Finance Journal, 7(1), 37-48.
  5. Abor, J., & Biekpe, N. (2006). An Empirical Test of the Agency Problems and Capital Structure of South African Quoted SMEs. South African Journal of Accounting Research, 20(1), 51–66.
  6. Ahmad, M. B., Kareem, S. D., Mautin, O. D., & Sakiru, O. K. (2015). Dynamic Relationship between Debt and Cash flow in Pecking Order Theory: Evidence from Panel GMM. Journal of Marketing and Consumer Research, 6(1), 2422-8451.
  7. Akerlof, G. A. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84(3), 488-500.
  8. Akinlo, O. (2011). Determinants of Capital Structure: Evidence from Nigerian Panel Data. African Economic and Business Review, 9(1), 1-16.
  9. Amidu, M. (2007). Determinants of Capital Structure of Banks in Ghana: An Empirical Approach. Baltic Journal of Management, 2(1), 67–79.
  10. Baker, M., & Wurgler, J. (2002). Market Timing and Capital Structure. Journal of Finance, 57(1), 1–32.
  11. Bany-Ariffin, A. N., & McGowan Jr, C. B. (2012). Trade-off Theory against Pecking Order Theory of Capital Structure in a Nested Model: Panel GMM Evidence from South Africa. The Global Journal of Finance and Economics, 9(2), 133-147.
  12. Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital Structures in Developing Countries. Journal of Finance, 56(1), 87–130.
  13. Brealey, R. A. & S. Myers (2003). Principle of Corporate Finance. McGraw-Hill/Irwin, New York.10th Edition
  14. Brealey, R. A., & Myers, S. C. (2000). Principles of Corporate Finance. Principles of Corporate Finance. McGraw-Hill/Irwin, New York.9th Edition.
  15. Brealey, R.A. and Myers, S.C. (1988). Principles of Corporate Finance. 3rd Ed. McGraw-Hill Publishing Co., New York.
  16. Chen, J. J. (2004). Determinants of Capital Structure of Chinese-Listed Companies. Journal of Business Research, 57(12), 1341–1351.
  17. Chen, L., & Zhao, X. (2004). The modified pecking order theory: new empirical evidence from corporate financing decisions. Unpublished working paper, Michigan State University.
  18. Chirinko, R.S., Singha, A.R. (2000). Testing Static Trade-Off Against Pecking Order Models Of Capital Structure: A Critical Comment. Journal of Financial Economics, 58(3), 417–425.
  19. Daude, C., & Fratzscher, M. (2008). The Pecking Order of Cross-Border Investment. Journal of International Economics, 74(1), 94-119.
  20. De Jong, A., Kabir, R., and Nguyen, T. T. (2008). Capital Structure around the World: The Roles of Firm-And Country-Specific Determinants. Journal of Banking & Finance, 32(9), 1954-1969.
  21. De Jong, A., Verbeek, M., & Verwijmeren, P. (2010). The Impact of Financing Surpluses and Large Financing Deficits on Tests of the Pecking Order Theory. Financial Management, 39(2), 733-756.
  22. Donaldson, G. (1961), Company Debt Capacity; A Study of Company Debt Policy and the Determination of Company Debt Capacity, Harvard Graduate School of Business Administration, Boston.
  23. Fama, E., French, K., 2002. Testing Trade-off and Pecking Order Predictions about Dividends and Debt. Review of Financial Studies 15(1), 1–33.
  24. Fama, E., Macbeth, J.D., 1973. Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy 81(3), 607–636.
  25. Fischer, E.O., Heinkel, R., Zechner, J. (1989). Dynamic Capital Structure Choice: Theory and Tests. Journal of Finance 44(1), 19–40.
  26. Frank, M. Z., & Goyal, V. K. (2003). Testing the Pecking Order Theory of Capital Structure. Journal of Financial Economics, 67(2), 217-248.
  27. Frank, Murray Z. And Goyal, Vidhan K. (2007). Trade-Off and Pecking Order Theories of Debt.
  28. Franklin, J. Muthusamy. KS (2011). Determinants of Financial Leverage in the Indian Pharmaceutical Industry. Asian Journal of Management Research, 380(2), 1.
  29. Fred, W. J., Thomas, C. E., & Brigham, E. F. (1992). Managerial Finance. 9th Edition. The Dryden Press Orlando Florida USA.
  30. Harris, M., Raviv, A. (1990a). Capital Structure and the Informational Role of Debt. The Journal of Finance, 45(2), 321-349.
  31. Harris, M., Raviv, A. (1991). The Theory of Capital Structure. Journal of Finance, 46, 297-355.
  32. Hovakimian, A. Opler, T. And Titman, S. (2001). The Debt-Equity Choice. Journal of Financial and Quantitative Analysis, 36(1), 1-24.
  33. Jensen, M. C., And Meckling, W. H. (1976). Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.
  34. Kariuki, S. N., &Kamau, C. G. (2014). Determinants of Corporate Capital Structure among Private Manufacturing Firms in Kenya: A Survey of Food and Beverage Manufacturing Firms. International Journal of Academic Research in Account.
  35. Kraus, A., & Litzenberger, R. H. (1973). A State‐Preference Model of Optimal Financial Leverage. The Journal of Finance, 28(4), 911-922.
  36. M., Raviv, A., 1991. The Theory of Capital Structure. Journal of Finance, 46(1), 297–356.
  37. Matemilola, B.T; Bany-Ariffin, A.N (2011). Pecking Order Theory of Capital Structure: Empirical Evidence from Dynamic Panel Data. International Journal on GSTF Business Review. 1 (1): 185–189.
  38. Modigliani, F. And Miller, M. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48 (3) 261-97.
  39. Muriu, P. W. (2016). Microfinance Performance. Does Financing Choice Matter. European Journal of Business and Management, 8(33), 77-93.
  40. Murray, F.Z., And Vidham K.G. (2003). Testing Pecking Order Theory of Capital Structure. Journal of Financial Economics, 67(2), 217 - 248.
  41. Myers, S. (1984). The Search for Optional Capital Structure. Midland Corporate Finance Journal, 1(1), 6- 16.
  42. Myers, S. C. (1984). The Capital Structure Puzzle. The Journal of Finance, 39(3), 574-592.
  43. Myers, S., (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5(2), 147- 176.
  44. Myers, S.C. (1985). The Capital Structure Puzzle. Journal of Finance, 39(3), 575-592.
  45. Myers, S.C., (2001). Capital Structure. Journal of Economic Perspectives 15(2), 81–102.
  46. Myers, Stewart C.; Majluf, Nicholas S. (1984). Corporate Financing And Investment Decisions When Firms Have Information Those Investors Do Not Have. Journal of Financial Economics. 13 (2): 187–221.
  47. Nairobi Securities Exchange (2016). NSE Handbook. Nairobi. NSE.
  48. Negash, M. (2002). Corporate Tax and Capital Structure: Some Evidence & Implication. Investment Analysts Journal, 31(56), 17-27.
  49. Ngugi, R. W. (2008). Capital Financing Behaviour: Evidence From Firms Listed On The Nairobi Stock Exchange. The European Journal of Finance, 14(7), 609-624.
  50. Ni, J., & Yu, M. (2008). Testing the pecking-order theory: Evidence from Chinese listed companies. Chinese Economy, 41(1), 97-113.
  51. Njoroge, L. N., & Nasieku (2016). Determinants of Capital Structure of Internet Service Providers in Kenya. The International Journal of Social Sciences and Information Technology, 2(2)
  52. Oino, I., & Ukaegbu, B. (2015). The Impact of Profitability on Capital Structure and Speed of Adjustment: An Empirical Examination of Selected Firms in Nigerian Stock Exchange. Research in International Business and Finance, 35, 111-121.
  53. Pandey, M. (2001). Capital Structure and the Firm Characteristics: Evidence from an Emerging Market. Available SSRN.
  54. Ramjee, A., & Gwatidzo, T. (2012). Dynamics in Capital Structure Determinants in South Africa. Meditari Accountancy Research, 20(1), 52–67.
  55. Ramjee, A., & Gwatidzo, T. (2012). Dynamics in Capital Structure Determinants in South Africa. Meditary Accountancy Research, 20(1), 52-67.
  56. Ross, S. A. (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. The Bell Journal of Economics, 8(1), 23-40.
  57. Schaefer, S. M., & Strebulaev, I. A. (2008). Structural Models Of Credit Risk Are Useful: Evidence From Hedge Ratios On Corporate Bonds. Journal of Financial Economics, 90(1), 1–19.
  58. Seifert, B., & Gonenc, H. (2010). Pecking Order Behaviour in Emerging Markets. Journal of International Financial Management and Accounting, 21(1), 1–31.
  59. Sheikh, N. A., & Wang, Z. (2011). Determinants of Capital Structure: An Empirical Study of Firms in the Manufacturing Industry of Pakistan. Managerial Finance, 37(2), 117–133. Http://Doi.Org/10.1108/03074351111103668
  60. Shyam-Sunder, L., & C. Myers, S. (1999). Testing Static Trade-Off Against Pecking Order Models Of Capital Structure. Journal of Financial Economics, 51(2), 219–244.
  61. Spence, M. (1973). Job Market Signaling. The Quarterly Journal of Economics, 87(3), 355-374.
  62. Stiglitz, J. (1969). A Re-Examination of the Modigliani-Miller Theorem. The American Economic Review, 59(2), 784–793.
  63. Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. Journal of Finance, 43(1), 1–19.
  64. Weston. J.F, And Copeland T.E, Management Finance, Dryden Press, New York, 1986 Working Paper, Indian Institute of Management Ahmedabad.
  65. Wooldridge, J. M. (2013). Introductory Econometrics: A Modern Approach.5th Edition, Nelson Education, Ltd, Michigan State University Press, Michigan.

About Us

The Asian Institute of Research is an online and open-access platform to publish recent research and articles of scholars worldwide. Founded in 2018 and based in Indonesia, the Institute serves as a platform for academics, educators, scholars, and students from Asia and around the world, to connect with one another. The Institute disseminates research that is proven or predicted to be of significant influence for the general public.

Stay Connected

  • Instagram - Black Circle
  • Facebook - Black Circle
  • LinkedIn - Black Circle

Contact Us

Please send all inquiries to the email:

Business Address:

5th Floor, Kavling 507, Fajar Graha Pena Tower, Jl. Urip Sumohardjo No.20, Makassar, Indonesia 90234

Copyright © 2018 The Asian Institute of Research. All rights reserved