The asymmetric effects of financing deficits and surpluses on the pecking order theory in sub-Saharan Africa

ABSTRACT

This paper is the first to examine the asymmetric effects of financing deficits and surpluses on the pecking order financing strategies in sub-Saharan Africa. Panel data estimation techniques are carried out on a sample of 564 non-financial firms for the years 2006 to 2014. Overall, the individual country analysis reveals that equity tracks the financing deficit better than debt for firms with financing deficits. However, the categorical analysis shows that firms operating in the weakest legal environments appear to follow pecking order financing strategies. A steady decline in the magnitude of the pecking order coefficient is observed as we progress from the weakest to the strongest legal systems. In addition, significant differences in the pecking order behaviour for firms with surpluses and deficits are observed in the upper and lower categories of banking and stock market development.

KEYWORDS:

• capital structure
• financing deficits
• financing surpluses
• panel data
• pecking order theory
• sub-Saharan Africa

Notes

1 The number of firm year observations in the categorical analysis is lower because of the use of the GMM models.

2 See the appendix for further detail on the categorical analysis. A composite measure for ROL and CC is used to capture the strength of the legal system. When these two variables are used independently, Kenya, Nigeria and Zimbabwe still remain in the bottom category of the strength of the legal system. Equivalently, Mauritius, Botswana and Namibia remain in the top category of the strength of the legal system.

3 The total debt ratio is not used, as it includes short-term debt which is captured in the calculation of the financing deficit as changes in the net working capital (see Frank and Goyal, 2003).

4 GMM specification tests are not satisfied for some of the countries. To ensure uniformity in the results, Panel OLS regressions are run for the individual countries.

5 For brevity, the coefficients on the country dummies are not reported.

6 Further details on the country groupings are in the appendix.