Trade-Off and Pecking Order Theories in Corporate Financing: Insights from Argentina

Abstract

The purpose of this paper is to explore the relationship between leverage and its key determinants within the context of Argentina, drawing on two prominent theories of capital structure: the trade-off theory and the pecking order theory. While there is an extensive body of literature on this topic, the number of studies that specifically address this issue in emerging economies like Argentina remains relatively scarce, and the existing results are often incomplete or contradictory. This paper aims to fill this gap by providing further empirical evidence on how firms in an emerging market navigate their financing decisions. To identify the companies included in the study, a stratified sampling methodology was employed, based on an economic criterion that helps ensure the sample accurately represents different sectors and company sizes. The data used in the analysis were derived from balance sheet information collected through a questionnaire distributed to the selected firms. Given the high inflationary environment in Argentina, the data were normalized to neutralize the effects of inflation, ensuring that the financial variables reflect the true economic conditions of the companies. The study covers a period of three years and includes a sample of 181 firms. To analyze the data, the research applies a static fixed effects (FE) model, which is commonly used in panel data analysis to control for unobserved heterogeneity across firms and to isolate the effects of the key determinants on leverage. The fixed effects model is particularly suitable for this context, as it allows for a detailed examination of how individual firm characteristics influence financial decisions over time, while controlling for time-invariant factors. The results of this paper contribute to the existing literature by providing new insights into the financial behavior of firms in an economic context that has not been extensively studied. The empirical findings shed light on the determinants of leverage in Argentina, offering a clearer understanding of the factors that drive corporate financing decisions in an emerging economy. By analyzing the relative importance of these factors, the paper offers valuable implications for Argentine entrepreneurs and business managers seeking to optimize their financial structures. Furthermore, the findings can guide future research in this area and provide practical recommendations for corporate decision-making. For example, understanding the relative importance of trade-off versus pecking order considerations in a high-inflation environment like Argentina can help firms make more informed choices about their capital structure. Managers can use these insights to navigate the complexities of financing decisions, balancing the benefits of debt with the costs associated with financial distress or loss of control. This paper contributes to the broader understanding of corporate financial behavior in emerging markets, particularly in the Argentine context. By applying established capital structure theories to a new setting, the study enhances the understanding of how firms in such economies make financial decisions and the key factors that influence their leverage.