Testing Static Trade-off Against Pecking Order Models of Capital Structure

Lakshmi Shyam-Sunder and Stewart C. Myers

No 4722, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper tests traditional capital structure models against the alternative of a pecking order model of corporate financing. The basic pecking order model, which predicts external debt financing driven by the internal financial deficit, has much greater explanatory power than a static trade-off model which predicts that each firm adjusts toward an optimal debt ratio. We show that the power of some usual tests of the trade-off model is virtually nil. We question whether the available empirical evidence supports the notion of an optimal debt ratio.

JEL-codes: G32 (search for similar items in EconPapers)
Date: 1994-04
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Journal of Financial Economics, February 1999

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