The pecking order, information asymmetry, and financial market efficiency

The first chapter of this paper studies the marginal debt issuance behavior of publicly traded companies using firm-level data from 42 countries. The implications of the strict version of the pecking order theory regarding marginal debt financing are rejected in the international data overall. However, and more importantly, we might expect reliance on marginal debt issuance to be higher in markets with less transparent financial systems since in those countries information asymmetry and adverse selection would be expected to be more of a problem. Using the framework of Shyam-Sunder and Myers (1999), that is what is found. This provides empirical support for the underlying assumptions of the pecking order theory regarding information asymmetry and dependence on debt financing. I also find empirical evidence that firms from developing countries are successful in their attempt to reduce this information asymmetry problem by exchange listing ADRs, as indicated by the Shyam-Sunder and Myers (1999) metric.;The second chapter focuses on the extent to which measures from the literature on finance and development can help to explain the observed differences among countries in the corporate use of marginal debt financing. This study provides empirical evidence that financial market imperfections and institutional development affect the debt issuance decisions of firms when raising external capital. Finally, the coefficient estimates of the pecking order regressions are significantly correlated with the long run average growth rates of the countries and appear to be a powerful objective measure of financial market efficiency.