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

Posted: 4 Oct 1999

See all articles by Lakshmi Shyam-Sunder

Lakshmi Shyam-Sunder

World Bank, International Finance Corp.

Stewart C. Meyers

Massachusetts Institute of Technology (MIT)

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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 (author's emphasis) financing driven by the internal financial deficit, has much greater explanatory power than a static trade-off model which predicts that each firm adjust 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.

JEL Classification: G31, G32

Suggested Citation

Shyam-Sunder, Lakshmi and Meyers, Stewart C., Testing Static Trade-Off Against Pecking Order Models of Capital Structure. Available at SSRN: https://ssrn.com/abstract=5380

Lakshmi Shyam-Sunder

World Bank, International Finance Corp.

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Stewart C. Meyers (Contact Author)

Massachusetts Institute of Technology (MIT)

E53-323
Cambridge, MA 02139
United States
617-253-6696 (Phone)
617-258-6855 (Fax)

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