TRADE-OFF THEORY VS. PECKING ORDER THEORY ? EMPIRICAL EVIDENCE FROM THE BALTIC COUNTRIES

Capital structure is of particular importance in estimating the company value; an accurately estimated and selected equity and debt ratio can maximize the company value and minimizes the cost of capital; therefore, this issue is especially significant in the changing conditions of economic development. The main purpose of this study is to simultaneously evaluate the pecking order and trade-off theories of capital structure and determine which one performs better for a sample of companies from the Baltic states. Analysis is conducted on a sample of 75 listed companies (Baltic Stock Exchange) over the period from 1998 to 2011. The authors test theories using panel data and regression analysis. The empirical results show that listed companies in Latvia, compared to the other countries, can be characterized by the lowest debt ratio, however an increase in the average debt ratio can be observed, therefore the gap has been reduced in the recent years. The study did not find evidence supporting pecking order theory, but results show that companies adjust their debt levels according to target debt.