The Trade-Off Theory and the Pecking Order Theory: Are They Mutually Exclusive?

28 Pages Posted: 14 May 2009

See all articles by Carmen Cotei

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 14, 2009

Abstract

The main purpose of this study is to examine the validity of putting the pecking order and trade-off theories of capital structure in a horse race. Our empirical models, which allow the financing coefficient and the rate of adjustment to vary with the firms' characteristics, provide evidence that the trade-off theory factors play a significant role in determining the proportion of debt to be issued or repurchased under the pecking order assumptions. In addition, we find that the pecking order factors are major determinants of the rate of adjustment under the trade-off theory assumptions. These empirical results imply that the pecking order theory and the trade-off theory are not mutually exclusive.

Keywords: capital structure, pecking order theory, trade-off theory

JEL Classification: G00, G10

Suggested Citation

Cotei, Carmen and Farhat, Joseph, The Trade-Off Theory and the Pecking Order Theory: Are They Mutually Exclusive? (May 14, 2009). Available at SSRN: https://ssrn.com/abstract=1404576 or http://dx.doi.org/10.2139/ssrn.1404576

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance ( email )

United States

Joseph Farhat (Contact Author)

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

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