Firm Maturity and the Pecking Order Theory

Abstract

We identify firms according to two life cycle stages, namely growth and maturity, and test the pecking order theory of financing. We find a strong maturity effect, i.e., the pecking_x000D_ order theory describes the financing behavior of mature firms better than growth firms. Our_x000D_ findings show that firm maturity is an alternative proxy for debt capacity. In particular, mature firms are older, more stable, and highly profitable with good credit histories. Thus, they naturally have greater debt capacity. After controlling for firm maturity, the pecking_x000D_ order theory describes the financing behavior of firms fairly well.