Firms’ debt–equity decisions when the static tradeoff theory and the pecking order theory disagree

A. de Jong, M. Verbeek, P. Verwijmeren

Research output: Contribution to JournalArticleAcademicpeer-review

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. © 2010 Elsevier B.V.
Original languageEnglish
Pages (from-to)1303-1314
JournalJournal of Banking and Finance
Volume35
Issue number5
DOIs
Publication statusPublished - 2011

Fingerprint

Dive into the research topics of 'Firms’ debt–equity decisions when the static tradeoff theory and the pecking order theory disagree'. Together they form a unique fingerprint.

Cite this