Testing Static Tradeoff Against Pecking Order Models of Capital Structure: A Critical Comment
Posted: 10 Apr 2001 Last revised: 14 Mar 2011
In a recent paper, Shyam-Sundar and Myers (1999) introduce a new test of the Pecking Order Model. This comment shows that their elegantly simple test generates misleading inferences when evaluating plausible patterns of external financing. Our results, coupled with the power problem with the Static Tradeoff Model documented by Shyam-Sunder and Myers, indicate that their empirical evidence can evaluate neither the Pecking Order nor Static Tradeoff Models. Alternative tests are needed that can identify the determinants of capital structure and can discriminate among competing hypotheses.
Keywords: Financing; Capital structure; Pecking order theory
JEL Classification: G32
Suggested Citation: Suggested Citation