Testing trade-off theory and pecking order theory in emerging markets

Abstract

Description of the goal, tasks and main results. The goal is to test whether the pecking order and trade-off theories’ predictions hold for the companies in the emerging markets, more specifically in Russia, Brazil and China. Tasks: - Analyze and structure the existing literature about the topic, and to identify discrepancies among the results of different approaches with the selected ones - Provide the explanation of the empirical methods utilized in present analysis - Formulate the hypotheses of the current study based on the theories’ predictions and the data descriptive statistics - Collect the financial data from official companies’ annual reports, Thomson Reuters (EIKON) and Bloomberg databases for Russia, Brazil and China - Build empirical models and conduct the regression analysis in STATA 12 software to test the hypotheses of the Pecking Order theory and to identify the industry for Trade-Off theory testing - Set the oil and gas industry leaders in Russia, Brazil and China, then construct marginal benefit and marginal cost curves to find the target debt ratio for the industry leaders, and finally to test the Trade-Off hypotheses - Conclude whether the theories’ predictions hold for sample companies over the observed period Companies do not tend to follow the classical Pecking Order theory, but the predictions about the financial indicators hold. Estimated period target debt level for the industry leader – Gazprom is acceptable and desirable while the competitors do not adjust their capital structures to this industry leader’s target debt level.