This paper extends the basic pecking order model of Shyam-Sunder and Myers (1999) by separating the effects of financing surpluses, normal deficits, and large deficits. Using a broad cross-section of publicly traded firms for 1971 to 2005, we find that the estimated pecking order coefficient is highest for surpluses (0.90), lower for normal deficits (0.74), and lowest when firms have large financing deficits (0.09). These findings shed light on two empirical puzzles: first, small firms – although having the highest potential for asymmetric information – do not behave according to the pecking order theory, and second, the pecking order theory has lost explanatory power over time. We provide a solution to these puzzles by showing that the frequency of large deficits is higher in smaller firms and increasing over time. As a result, our findings support a pecking order theory that considers firms' debt capacities

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Rotterdam School of Management (RSM), Erasmus University

de Jong, A., Verbeek, M., & Verwijmeren, P. (2007). Testing the Pecking Order Theory: The Impact of Financing Surpluses and Large Financing Deficits. Retrieved from