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

North American Journal of Finance and Banking Research, Vol. 3, No. 3, 2009

16 Pages Posted: 19 Jan 2010  

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: August 24, 2009

Abstract

The main purpose of this study is to simultaneously examine the pecking order and trade-off theories of capital structure and determine which one performs better for a sample of US firms. 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 B., The Trade-Off Theory and the Pecking Order Theory: Are they Mutually Exclusive? (August 24, 2009). North American Journal of Finance and Banking Research, Vol. 3, No. 3, 2009. Available at SSRN: https://ssrn.com/abstract=1536714

Carmen Cotei (Contact Author)

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

United States

Joseph Farhat

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

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