Testing Tradeoff and Pecking Order Predictions About Dividends and Debt

46 Pages Posted: 15 Dec 1999  

Eugene F. Fama

University of Chicago - Finance

Kenneth R. French

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Date Written: December 2000

Abstract

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.

JEL Classification: G31, G32, G35

Suggested Citation

Fama, Eugene F. and French, Kenneth R., Testing Tradeoff and Pecking Order Predictions About Dividends and Debt (December 2000). CRSP Working Paper No. 506. Available at SSRN: https://ssrn.com/abstract=199431 or http://dx.doi.org/10.2139/ssrn.199431

Eugene F. Fama (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)

Kenneth R. French

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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