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ACCA FM知识点：Pecking order theory
文章来源：ACCA全球官网
发布时间：2021-11-26 14:03
阅读：799次
公司的资本结构是指公司用于为其资产融资的股权和债务融资的混合。一些公司可能是全股权融资，根本没有债务，而其他公司可能拥有低水平的股权和高水平的债务。股权和债务资本混合的决定称为融资决策。上文我们介绍了Tax exhaustion，本文我们继续讲解Pecking order theory。
Pecking order theory
The pecking order theory is in sharp contrast with the theories that attempt to find an optimal capital structure by studying the trade-off between the advantages and disadvantages of debt finance.In this approach,there is no search for an optimal capital structure.Companies simply follow an established pecking order which enables them to raise finance in the simplest and most efficient manner,the order is as follows:
1.Use all retained earnings available;
2.Then issue debt;
3.Then issue equity,as a last resort.
The justifications that underpin the pecking order are threefold:
●Companies will want to minimise issue costs.
●Companies will want to minimise the time and expense involved in persuading outside investors of the merits of the project.
●The existence of asymmetrical information and the presumed information transfer that result from management actions.We shall now review each of these justifications in more detail.
Minimise issue costs
Retained earnings have no issue costs as the company already has the funds
Issuing debt will only incur moderate issue costs
Issuing equity will incur high levels of issue costs
Minimise the time and expense involved in persuading outside investors
As the company already has the retained earnings,it does not have to spend any time persuading outside investors
The time and expense associated with issuing debt is usually significantly less than that associated with a share issue
The existence of asymmetrical information
This is a fancy term that tells us that managers know more about their companies’prospects than the outside investors/the markets.Managers know all the detailed inside information,whilst the markets only have access to past and publicly available information.This imbalance in information(asymmetric information)means that the actions of managers are closely scrutinised by the markets.Their actions are often interpreted as the insiders’view on the future prospects of the company.A good example of this is when managers unexpectedly increase dividends,as the investors interpret this as a sign of an increase in management confidence in the future prospects of the company thus the share price typically increases in value.
Suppose that the managers are considering how to finance a major new project which has been disclosed to the market.However managers have had to withhold the inside scoop on the new technology associated with the project,due to the competitive nature of their industry.Thus the market is currently undervaluing the project and the shares of the company.The management would not want to issue shares,when they are undervalued,as this would result in transferring wealth from existing shareholders to new shareholders.They will want to finance the project through retained earnings so that,when the market finally sees the true value of the project,existing shareholders will benefit.If additional funds are required over and above the retained earnings,then debt would be the next alternative.
When managers have favourable inside information,they do not want to issue shares because they are undervalued.Thus it would be logical for outside investors to assume that managers with unfavourable inside information would want to issue share as they are overvalued.Therefore an issue of equity by a company is interpreted as a sign the management believe that the shares are overvalued.As a result,investors may start to sell the company’s shares,causing the share price to fall.Therefore the issue of equity is a last resort,hence the pecking order;retained earnings,then debt,with the issue of equity a definite last resort.
One implication of pecking order theory that we would expect is that highly profitable companies would borrow the least,because they have higher levels of retained earnings to fund investment projects.Baskin(1989)found a negative correlation between high profit levels and high gearing levels.This finding contradicts the idea of the existence of an optimal capital structure and gives support to the insights offered by pecking order theory.
Another implication is that companies should hold cash for speculative reasons,they should built up cash reserves,so that if at some point in the future the company has insufficient retained earnings to finance all positive NPV projects,they use these cash reserves and therefore not need to raise external finance.
Conclusion
As the primary financial objective is to maximise shareholder wealth,then companies should seek to minimise their weighted average cost of capital(WACC).In practical terms,this can be achieved by having some debt in the capital structure,since debt is relatively cheaper than equity,while avoiding the extremes of too little gearing(WACC can be decreased further)or too much gearing(the company suffers from bankruptcy costs,agency costs and tax exhaustion).Companies should pursue sensible levels of gearing.
Companies should be aware of the pecking order theory which takes a totally different approach,and ignores the search for an optimal capital structure.It suggests that when a company wants to raise finance it does so in the following pecking order:first is retained earnings,then debt and finally equity as a last resort.
Patrick Lynch is a lecturer at Dublin Business School
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