NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Lakshmi Shyam-Sunder, Stewart C. Myers

NBER Working Paper No. 4722
Issued in April 1994
NBER Program(s):   CF

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.

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Document Object Identifier (DOI): 10.3386/w4722

Published: Journal of Financial Economics, February 1999

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