Testing Static Trade-Off Pecking Order Models of Capital Structure (Classic Reprint) - Tapa blanda

Sinopsis

Excerpt from Testing Static Trade-Off Pecking Order Models of Capital Structure

The theory of capital structure has been dominated by the search for optimal capital structure. Optimums normally require a trade-off, in this case between the tax advantages of borrowed money and the costs of financial distress when the firm finds it has borrowed too much. A value-maximizing firm would equate this benefit and cost at the margin, and operate at the top of the curve in Figure 1. The curve would top out at relatively high debt ratios for safe, profitable firms with plenty of taxes to shield and assets whose values would escape serious damage in financial distress. This static trade-017 theory quickly translates to empirical hypotheses. For example, it predicts reversion of the actual debt ratio towards a target or Optimum, and it predicts a cross-sectional relationship between average debt ratios and asset risk, profitability, tax status and asset type.

Several pounds of empirical literature have been guided by such hypotheses. Most of these studies have supported the static trade-off theory. That is, they have rejected the null, and shown some statistically significant coefficients consistent with the theory. However, none of these papers has systematically compared the explanatory power of their fitted equations with alternative explanations of financing behavior, and none has checked whether their equations could seem to work even when actual financing is driven by other forces. That is, they have not checked the power of their tests against alternative hypotheses.

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