Working Paper: NBER ID: w1393
Authors: Stewart C. Myers
Abstract: 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.
Keywords: capital structure; pecking order theory; static tradeoff theory
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax advantages from debt (H63) | firms' leverage decisions (G32) |
| internal cash flows (D25) | firms' capital structure choices (G32) |
| need for external financing (G32) | firms' capital structure choices (G32) |
| asset type (H82) | leverage decisions (G11) |