NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Structure Puzzle

Stewart C. Myers

NBER Working Paper No. 1393
Issued in July 1984
NBER Program(s):   ME   PE

This paper contrasts the "static tradeoff" and "pecking order" theories of capital structure choice by corporations. In the static tradeoff theory, optimal capital structure is reached when the tax advantage to borrowing is balanced, at the margin, by costs of financial distress. In the pecking order theory, firms preferinternal to external funds, and debt to equity if external funds are needed. Thus the debt ratio reflects the cumulative requirement for external financing. Pecking order behavior follows from simple asymmetric information models. The paper closes with a review of empirical evidence relevant to the two theories.

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Document Object Identifier (DOI): 10.3386/w1393

Published: Myers, Stewart C. "Capital Structure Puzzle," Journal of Finance, Vol. 39, No. 3, July 1984, pp. 575-592.

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