We set out in the present study to analyze the differences in capital structure within financially-distressed firms under the ‘trade-off’ and ‘pecking order’ theories, and to determine which financing approach is more beneficial to such financially-distressed firms. Our econometric analysis is performed under the following two steps. Firstly, we select a number of firms under financial distress and attempt to identify their capital structure in order to determine their characteristics. Secondly, we divide our sample of financially-distressed firms into two categories, the first of which are referred to as ‘Truly Failed’ firms, whilst the second category is referred to as ‘Normal’ firms (those previously in financial distress but which subsequently recovered and ultimately resumed their normal operations). Prior to the occurrence of financial distress, support is provided by both the ‘Normal’ firms and ‘Truly Failed’ firms for the ‘pecking order’ theory, thereby indicating that these firms have no specific preferences for financing. Following the occurrence of financial distress, the empirical results on the ‘Normal’ firms continue to provide support for the ‘pecking order’ theory, whereas the results on the ‘Truly Failed’ firms provide no such support.
Relation:
African Journal of Business Management 4(18), pp.4110-4117
