Chapter 10: Trade-Off Theory Versus Pecking Order Theory: The Determinants of Capital Structure Decisions for the Ghanaian Listed Firms

This study seeks to investigate whether firms’ capital structure decisions are congruent with the assumptions underpinning the traditional trade-off theory and the pecking order theory in Ghana. Using a sample of listed firms, the dynamic system generalized method of moments (GMM) technique is applied on a balanced panel data spanning 2008–2016. The findings reveal that the financing decisions of Ghanaian firms adhere to the pecking order theory, given the established relationship between leverage and profitability, firm age, as well as firm size. The study also shows that tax does not matter for corporate leverage, departing from the tax proposition of the traditional trade-off theory. However, the negative effect of growth opportunities and risk on debt corroborates the trade-off theory. Consequently, it is postulated that the trade-off theory and the pecking order theory are not discordant in predicting firms’ capital structure decisions in Ghana.