TESTING OF PECKING ORDER THEORY THROUGH THE RELATIONSHIP: EARNINGS, CAPITAL STRUCTURE, DIVIDEND POLICY AND FIRM’S VALUE
Jurusan Manajemen Fakultas Ekonomi Universitas Merdeka Malang
Jl. Terusan Raya Dieng No.62-64 Malang, 65146.
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This study aimed to test the pecking order theory through its correlation among earnings dimension, capital structure, dividend policy and firm’s value perspective. By loading the correlation between dimension one to another, it indicated that management behavior tended to retained earnings accumulation or to debt collection in financing the operation of the firm. The pecking order theory were tested when the management behavior tended to retained earnings in accumulating sources of the fund equity rather than borrowing liabilities from creditors. Therefore, rationally if the capital structure was optimum, management tended to external financing until any trade off between earnings and debt financing. Based on the testing hypothesis, it indicated that the role of capital structure dimension had significance as intervening variable between earnings dimension and firm’s value. On the other hand, the dividend policy had no significance to become intervening variable. Empirically, it could be concluded that the management behavior in Indonesia tended to leverage rather than retained earnings accumulation in supporting the pecking order theory. Furthermore, the variable had the role to differentiate the characteristic of industries represented by the capital structure dimension, especially, debt to assets and debt to equity ratio.
Key words: pecking order theory, earnings, capital structure, dividend policy, firm’s value