35 Pages Posted: 27 Apr 2000
Date Written: July 1984
This paper contrasts the "static tradeoff" and "pecking order" theories of capital structure choice by corporations. In the static tradeoff theory, optimal capital structure is reached when the tax advantage to borrowing is balanced, at the margin, by costs of financial distress. In the pecking order theory, firms preferinternal to external funds, and debt to equity if external funds are needed. Thus the debt ratio reflects the cumulative requirement for external financing. Pecking order behavior follows from simple asymmetric information models. The paper closes with a review of empirical evidence relevant to the two theories.
Suggested Citation: Suggested Citation
Myers, Stewart C., Capital Structure Puzzle (July 1984). NBER Working Paper No. w1393. Available at SSRN: https://ssrn.com/abstract=227147