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

de Jong, A., Verbeek, M. and Verwijmeren, P. (2011) Firms' debt-equity decisions when the static tradeoff theory and the pecking order theory disagree. Journal of Banking and Finance, 35(5), pp. 1303-1314. (doi: 10.1016/j.jbankfin.2010.10.006)

Full text not currently available from Enlighten.

Publisher's URL: http://dx.doi.org/10.1016/j.jbankfin.2010.10.006

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.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Verwijmeren, Professor Patrick
Authors: de Jong, A., Verbeek, M., and Verwijmeren, P.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Banking and Finance
ISSN (Online):0378-4266
Published Online:10 October 2010

University Staff: Request a correction | Enlighten Editors: Update this record