Firms' debt-equity decisions when the static tradeoff theory and the pecking order theory disagree

Abe de Jong, Marno Verbeek, Patrick Verwijmeren

Research output: Contribution to journalArticleResearchpeer-review

51 Citations (Scopus)

Abstract

This paper tests the static tradeoff theory against the pecking order theory. We focus on an important difference in prediction: the static tradeoff theory argues that a firm increases leverage until it reaches its target debt ratio, while the pecking order yields debt issuance until the debt capacity is reached. We find that for our sample of US firms the pecking order theory is a better descriptor of firms' issue decisions than the static tradeoff theory. In contrast, when we focus on repurchase decisions we find that the static tradeoff theory is a stronger predictor of firms' capital structure decisions.

Original languageEnglish
Pages (from-to)1303-1314
Number of pages12
JournalJournal of Banking and Finance
Volume35
Issue number5
DOIs
Publication statusPublished - May 2011
Externally publishedYes

Keywords

  • Capital structure
  • Debt capacity
  • Pecking order theory
  • Static tradeoff theory

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