Question

(essay) As far as you know, do companies in Thailand follow the pecking order theory to raise funds for selected investments or not? how?

Answer 1

Answer:

Pecking Order Theory

Pecking order or peck order is the colloquial term for the hierarchical system of social organization.The original use of pecking order referred to the expression of dominance in chickens.

Pecking order theory is a theory related to capital structure. It was initially suggested by Donaldson. In 1984, Myers and Majluf modified the theory and made it popular. According to this theory, managers follow a hierarchy to choose sources of finance.

The pecking order theory states that a company should prefer to finance itself first internally through retained earnings. If this source of financing is unavailable, a company should then finance itself through debt. Finally, and as a last resort, a company should finance itself through the issuing of new equity. This pecking order is important because it signals to the public how the company is performing. If a company finances itself internally, that means it is strong. If a company finances itself through debt, it is a signal that management is confident the company can meet its monthly obligations. If a company finances itself through issuing new stock, it is normally a negative signal, as the company thinks its stock is overvalued and it seeks to make money prior to its share price falling.

The pecking order theory states that managers display the following preference of sources to fund investment opportunities: first, through the company's retained earnings, followed by debt, and choosing equity financing as a last resort.

Analysis:

• Capital structure decision is crucial for a firm to ensure credit is not a threat to a firm, instead it acts as a boosting factor for the company growth and survival.
• Companies commonly refer to the two competing theory, the pecking order theory and the trade-off theory in determining their optimal capital structure.
• The comparative study is to find evidence of the application of the pecking order theory in food and beverages industry in two countries, Malaysia and Thailand.
• The paper includes five explanatory variables in determining companies leverage; which are profitability, asset tangibility, growth opportunity, firm size, and liquidity level.
• Employing the unbalanced panel data, the study estimates the random effect model for Malaysia and the fixed effect model for Thailand.
• The study covers ten (10) years period from 2004 to 2013 of 37 Malaysian F&B companies and 38 Thailand F&B companies, all are publicly listed in the Bursa Malaysia and the Stock Exchange of Thailand respectively.
• The results find evidences of the pecking order theory application in both countries. Except for asset tangibility and growth opportunity, findings for Malaysia and Thailand are relatively similar.

There are several ways that firms can decide what the ideal capital structure is between cash coming in from sales, stock sold to investors, and debt sold to bondholders. Accurate analysis of capital structure can help a company by optimizing the cost of capital and hence improving profitability.

Conclusion:

As for as my understanding , Thailand companies follow the pecking order theory to raise the funds Due to companies prefer internal financing rather than the external financing, debt and equity.The study implies F&B companies in Malaysia and Thailand have lower external financing with higher profitability.