Testing the Pecking Order and Signalling Theories for Financial Institutions in Ghana

Abstract

Studies on the nature of capital structure of firms worldwide have focused on its impact on financial performance and its determinants, only few studies have tried to empirically test the theoretical basis of capital structure most especially in Ghana and Africa at large. From this backdrop, this study tested the pecking order theory which is of the view that there is a financing order and the signalling theory which suggests that a financial institution’s financing strategy sends diverse signals to potential lenders about the financial dependence. The results indicate that the pecking order and signalling theories are significantly been applied by the financial institutions in Ghana. This conclusion is arrived at after the panel data methodology was employed in the model estimation. The study therefore suggest that in as much as possible financial institutions should conform to the pecking order theory, they should implement policies which would increase their cash flow as it signals to investors that the firms are financially dependent.

Keywords: Financial institution, Pecking Order Theory, Signalling Theory, Panel

JEL: G3, M00, M1