46 Pages Posted: 15 Dec 1999
Date Written: December 2000
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: 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
By Eugene Fama