Testing the Pecking Order and Signalling Theories of Quoted Non-Financial Firms in South Africa
Testing the Pecking Order and Signalling Theories of Quoted Non-Financial Firms in South Africa

Summary/Abstract: The purpose of the research was to examine pecking order and signaling theories from three angles: investment, cash flow, and leverage, for non-financial enterprises in South Africa. Specifically, the research ascertained, if non-financial firms in South Africa followed pecking order and signaling theories with respect to making financial decision. As a result of the nature of research, secondary data ranging from 2010-2021 were applied, and population of the study consists of all non-financial enterprises registered on South African Stock Exchange. During the time of the study, there were total of 176 firms; however, due to statistical screening, only 156 businesses were included in the final sample. In addition to descriptive and correlative analysis, data were analyzed using Generalized Least Square (GLS) estimator. According to Myers (1984), a negative sign for delayed leverage suggests that enterprises should maintain lower current debt level in order to accrue financing capacity for future investments. In contrast, the results of this investigation shown that, non-financial enterprises do not necessarily carry less leverage in anticipation of financial requirement of future investment needs, since lag of leverage had positive sign. Both cash flow and revenue variables revealed negative coefficients, disproving signaling hypothesis. The signaling theory was validated in cash flow equation, and the signaling effect and the pecking order effect were confirmed in leverage equation. The findings provided sufficient evidence to support inferences that pecking order and signaling theories hold true for nonfinancial enterprises, and that information released has value in the market. However, the signaling theory seems to be more widely accepted in the contexts we've looked at. The study recommends that; managers of non-finance firms should utilize their assets appropriately for provision of sufficient internal funds (retained earnings) for their businesses rather than equity.

• Details
• Contents