Testing Tradeoff and Pecking Order Predictions About Dividends and Debt
Eugene F. Fama
University of Chicago - Finance
Kenneth R. French
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)
CRSP Working Paper No. 506
Confirming predictions shared by the tradeoff and pecking order models, more profitable firms and firms with fewer investments have higher dividend payouts. Confirming the pecking order model but contradicting the tradeoff model, more profitable firms are less levered. Firms with more investments have less market leverage, which is consistent with the tradeoff model and a complex pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment. As the pecking order model predicts, short-term variation in investment and earnings is mostly absorbed by debt.
Number of Pages in PDF File: 46
JEL Classification: G31, G32, G35
Date posted: December 15, 1999
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