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Sectoral Analysis of the Applicability of Pecking Order Hypothesis: Evidence from Nigeria

Dumkpege, Wisdom Letom, Suka L. C. Adamgbo, Henry, W. Akani Chukwunenye, N., Kocha

Abstract

This study examines the applicability of the Pecking Order Hypothesis among non-financial quoted firms listed on the Nigerian Exchange. A balanced panel dataset of 96 firms was obtained from published annual reports covering the period 2016 to 2024. Using panel econometric techniques, the study evaluates both aggregate and sector-specific financing behaviour, with changes in debt usage employed as the key variable for assessing adherence to the pecking order hierarchy. The empirical results provide considerable support for the Pecking Order Hypothesis in explaining corporate financing behaviour. The financing deficit variable is positive and statistically significant across most samples and sectors, indicating that firms tend to increase debt financing when internally generated funds are insufficient. Overall, the findings suggest that Nigerian non- financial firms broadly follow the pecking order logic; however, the extent of adherence is partial and varies meaningfully across sectors. At the aggregate level, all firms exhibit a moderate alignment with the pecking order framework. Large firms (excluding growth-oriented firms) also demonstrate moderate adherence, whereas growth firms display only a weak relationship with the hypothesis, reflecting more flexible financing behaviour. Sectoral analysis further reveals clear heterogeneity: the agricultural sector shows behaviour inconsistent with the pecking order logic, while the healthcare sector exhibits only weak adherence. In contrast, consumer goods, industrial goods, ICT, and oil and gas sectors reflect moderate conformity, whereas the services, conglomerates, and construction/real estate sectors show strong alignment with the pecking order pattern. Overall, the findings indicate that financing decisions among Nigerian non-financial firms are consistent with pecking order behaviour, but not rigidly so. Rather, firms adapt their financing choices in response to sector-specific characteristics and operational realities within an emerging market environment. Based on these findings, the study recommends that financing decisions among non-financial quoted firms in Nigeria should be guided by sector-specific conditions rather than a uniform approach. Managers in sectors exhibiting strong adherence such as conglomerates, construction/real estate, services, consumer goods, industrial goods, and oil and gas should continue to prioritise the use of internally generated funds followed by debt, in line with observed behavioural patterns. In contrast, firms in sectors where the hypothesis is weak or not supported, particularly agriculture and healthcare, should adopt more flexible financing approaches that combine internal funds, debt, and equity, while improving financial transparency to reduce information frictions. Policymakers and regulators should also enhance sector-sensitive financing policies and deepen access to funding channels, particularly for growth-oriented firms, to improve overall financing efficiency and market development. Keyword: Pecking Order Hypothesis; Non-financial firms; Nigerian Exchange; Financing behaviour; Panel data analysis; Sectoral heterogeneity; Debt financing; Emerging markets; Corporate finance; Nigeria.

References

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