Testing Static Trade-Off Against Pecking Order Models of Capital Structure

35 Pages Posted: 29 Jun 2000 Last revised: 13 Apr 2008

See all articles by Lakshmi Shyam-Sunder

Lakshmi Shyam-Sunder

World Bank, International Finance Corp.

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

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Date Written: April 1994

Abstract

This paper tests traditional capital structure models against the alternative of a pecking order model of corporate financing. The basic pecking order model, which predicts external debt financing driven by the internal financial deficit, has much greater explanatory power than a static trade-off model which predicts that each firm adjusts toward an optimal debt ratio. We show that the power of some usual tests of the trade-off model is virtually nil. We question whether the available empirical evidence supports the notion of an optimal debt ratio.

Suggested Citation

Shyam-Sunder, Lakshmi and Myers, Stewart C., Testing Static Trade-Off Against Pecking Order Models of Capital Structure (April 1994). NBER Working Paper No. w4722. Available at SSRN: https://ssrn.com/abstract=226998

Lakshmi Shyam-Sunder

World Bank, International Finance Corp.

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Stewart C. Myers (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6696 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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