Exploring capital structure theories in Latin America

The main objective of this research is to verify the validity of capital structure theories with pecking order and trade off models for examining how companies finance themselves in Latin America. A sample of corporations from Argentina, Brazil, Chile, Mexico, and Peru that assumedly had traded in their respective stock markets during the period 1995 - 2007 was selected. Using a panel study, the hypothesis of pecking order was rejected; that is to say, pecking order does not explain the policy of indebtedness that the Latin American companies have. On the contrary, findings indicate that such companies prefer to become indebted and enjoy the benefits as well as the costs that indebtedness entails than to finance themselves with the funds that they have generated. Thus, the authors conclude that when it comes to their capital structures, apparently for the period under study, Latin American companies' behavior rather follows the trade off model.