ABSTRACT
The capital structure of the firm received high attention in the literature. Two main theoretical frameworks have been developed: the Pecking-Order Theory and the Static Trade-off Theory. The first one argues that, due to asymmetric information, firms create a hierarchy in their financial preferences so that internal financing is preferred over external financing. When external financing would be needed, equity issuance would be used as a last resort. The Static Trade-off Theory implies that the firms move towards an indebtedness target ratio. Even if we find empirical evidence for both of them, no consensus can be stated. Hence, we focus on a specific small market to assess which theory could explain financial policies.
This article shows empirical evidence on financial behaviours of privately held firms on the Belgian market which is nearly unexplored in this area. Furthermore, as few attentions were given in this field, we subsample for family and nonfamily firms to figure out if family involvement could induce different financial choices.
On a sample of 210 privately held firms for the period 2002-2010, panel data methodology was employed to estimate Pecking-Order and Static Trade-off models. The objective is to proceed to a comparative method to assess if we cope with Pecking-Order or Static trade-off Theory. After testing for the entire sample we find evidence that privately held firms try to reach an indebtedness target ratio validating Static Trade-off theory. Moreover, after subsampling we find a difference between family and nonfamily businesses. While nonfamily businesses seem to match with neither Pecking-Order nor Static Trade-off Theory, family businessess are more likely to adopt an indebtedness target ratio. Hence, family involvement could be a determinant of financial structure.