Testing capital structure models on Philippine listed firms

This study examines the ability of the Trade-Off (TO) model and the Pecking Order (PO) model to explain the financing behaviour of Philippine listed firms from 1990 to 2001. Using panel data regression techniques, the firms' leverage ratios move towards their optimal level, holding up the TO model. The results, however, show better support for the PO model, as leverage and profitability are negatively related, while financing deficit mostly explains the annual change in total liabilities. Furthermore, in joint tests, only the fitted values from the PO model equation continue to have additional explanatory power over fitted values from the TO model. Firms issued more equity than debt from 1990 to 1996 when stock market prices were increasing rapidly, but this still fits the more complex version of the PO model.