Working Paper: NBER ID: w4722
Authors: Lakshmi ShyamSunder; Stewart C. Myers
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 financing driven by the internal financial deficit, has much greater explanatory power than a static trade-off model which predicts that each firm adjusts 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.
Keywords: Capital Structure; Pecking Order; Static Tradeoff; Corporate Finance
JEL Codes: G32; D92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| internal cash flow deficits (G33) | debt issuance (H63) |
| pecking order model (D20) | debt ratios (G32) |
| static tradeoff model (F11) | debt ratios (G32) |
| debt ratios (G32) | firm characteristics (L20) |
| financial deficits (H62) | pecking order model (D20) |