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

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.

Essays in corporate financing

Thesis (Ph. D.)--Massachusetts Institute of Technology, Sloan School of Management, 1989.Includes bibliographical references.by Lakshmi Shyam-Sunder.Ph.D

Testing static trade-off against pecking order models of capital structure

"First Draft: October 1992, this draft, April 1994."--3rd prelim p