Firms' debt-equity decisions when the static tradeoff theory and the pecking order theory disagree

Abe de Jong, Marno Verbeek and Patrick Verwijmeren

Journal of Banking & Finance, 2011, vol. 35, issue 5, 1303-1314

Abstract: This paper tests the static tradeoff theory against the pecking order theory. We focus on an important difference in prediction: the static tradeoff theory argues that a firm increases leverage until it reaches its target debt ratio, while the pecking order yields debt issuance until the debt capacity is reached. We find that for our sample of US firms the pecking order theory is a better descriptor of firms' issue decisions than the static tradeoff theory. In contrast, when we focus on repurchase decisions we find that the static tradeoff theory is a stronger predictor of firms' capital structure decisions.

Keywords: Capital; structure; Pecking; order; theory; Static; tradeoff; theory; Debt; capacity (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00387-0
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:5:p:1303-1314

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().