What should they do? Capital structure behavior in financially-distressed firms

We set out in the present study to analyze the differences in capital structure within financially-distressed firms under the ʹtrade-offʹ and ʹpecking orderʹ theories, and to determine which financing approach is more beneficial to such financially-distressed firms. Our econometric analysis is performed under the following two steps. Firstly, we select a number of firms under financial distress and attempt to identify their capital structure in order to determine their characteristics. Secondly, we divide our sample of financially-distressed firms into two categories, the first of which are referred to as ʹTruly Failedʹ firms, whilst the second category is referred to as ʹNormalʹ firms (those previously in financial distress but which subsequently recovered and ultimately resumed their normal operations). Prior to the occurrence of financial distress, support is provided by both the ʹNormalʹ firms and ʹTruly Failedʹ firms for the ʹpecking orderʹ theory, thereby indicating that these firms have no specific preferences for financing. Following the occurrence of financial distress, the empirical results on the ʹNormalʹ firms continue to provide support for the ʹpecking orderʹ theory, whereas the results on the ʹTruly Failedʹ firms provide no such support.