Testing Static Trade-off Against Pecking Order Models of Capital Structure
Open accessAbstract
This paper tests traditional capital structure models against the alternative of a pecking order model of corporate fmancing.The basic pecking order model, which predicts external debt fmancing driven by the internal fmanciai 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.
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- Findingown data
The paper's tests can correctly reject the pecking order when it is false.
“However, our tests can correctly reject the pecking order when it is false.”
- Also stated in: § 4. Power · plain
“The simple pecking order test does not suffer from this lack of power, it is correctly rejected when it is false.”
Quote in the paperSubstantial claim - Also stated in: § 4. Power · plain
- Findingreasoning
The usual tests of the static trade-off theory lack power.
“Furthermore, it demonstrates that some target adjustment models appear to work even when firms are following a pure pecking order model of financing, and therefore that the usual tests of the static trade-off theory lack power.”
- Also stated in: § 4. Power · boosted
“We also demonstrate that several other tests of the static trade-off hypothesis likewise lack power.”
Quote in the paperSubstantial claim - Also stated in: § 4. Power · boosted
- Findingown data
Some target adjustment models appear to work even when firms are following a pure pecking order model of financing.
“Furthermore, it demonstrates that some target adjustment models appear to work even when firms are following a pure pecking order model of financing, and therefore that the usual tests of the static trade-off theory lack power.”
- Also stated in: § 4. Power · boosted
“We demonstrate that the target adjustment model is frequently accepted even when it is known to be false.”
Quote in the paperSubstantial claim - Also stated in: § 4. Power · boosted
- Findingown data
For many individual firms, the R2 and coefficient estimates for the simple pecking order model are exactly or very close to 1.0.
“Indeed, for many individual firms, the R2 and the coefficient estimates are exactly, or very close to, 1.0.”
Quote in the paperSubstantial claim - Findingown data
Several other tests of the static trade-off hypothesis likewise lack power.
“We also demonstrate that several other tests of the static trade-off hypothesis likewise lack power.”
Quote in the paperSubstantial claim
- Findingown data
Firms resort almost exclusively to debt when they have a financial deficit.
“We find strong support for the pecking order prediction that firms resort (almost) exclusively to debt when there is a financial deficit.”
- Also stated in: § Results · boosted
“The pecking order results support the stylized fact --evident in macroeconomic data -that external funding is dominated by debt.We document the result at the firm level.”
Quote in the paperSubstantial claim - Also stated in: § Results · boosted
- Findingown data
The target adjustment model is frequently accepted even when it is known to be false.
“We demonstrate that the target adjustment model is frequently accepted even when it is known to be false.”
Quote in the paperSubstantial claim - Findingown data
The high explanatory power of the simple pecking order model is not driven merely by short-term adjustments to unanticipated financing deficits or surpluses.
“However the significance of the instruments for the planned deficit are scarcely changed, indicating that the high explanatory power of our simple pecking order model is not driven merely by short-term adjustments to unanticipated financing deficits or surpluses.”
- Also stated in: § Anticipated vs. atuaI deficits · boosted
“Table 3 demonstrates that the high explanatory power of the pecking order is not driven by impediments to equity issues or retirements on short notice.”
Quote in the paperSubstantial claim - Also stated in: § Anticipated vs. atuaI deficits · boosted
- Findingnone given
The power of some usual tests of the static trade-off model is virtually nil.
“We show that the power of some usual tests of the trade-off model is virtually nil.”
Quote in the paperSubstantial claim - Findingown data
When the target is based on a three- or five-year rolling average of the book debt ratio up to the preceding year, the adjustment coefficients are not significant.
“However, when the target is based on a three or five-year rolling average of the book debt ratio up to the preceding year, the adjustment coefficients are not significant.”
Quote in the paperSubstantial claim - Findingown data
The pecking order hypothesis did less well in the last half of the 1980s than earlier.
“Comparison of these two histograms hints that the pecking order hypothesis did less well in the last half of the 1980s.”
Quote in the paperNot a substantial claim - Findingown data
The basic pecking order model, in which external debt financing is driven by the internal financial deficit, explains corporate financing much better than a static trade-off model in which each firm adjusts toward an optimal debt ratio.
“The basic pecking order model, which predicts external debt fmancing driven by the internal fmanciai deficit, has much greater explanatory power than a static trade-off model which predicts that each firm adjusts toward an optimal debt ratio.”
Quote in the paperSubstantial claim - Findingown data
The pecking order serves as a useful first-order description of how corporations finance themselves.
“The pecking order is an effective first-order descriptor of corporate financing behavior.”
Quote in the paperSubstantial claim - Findingown data
The target adjustment model fits the pecking-order-generated debt ratio series as well as it fits actual data.
“It fits the pecking order series equally well!”
Quote in the paperSubstantial claim - Findingown data
Which independent variables are significant in the cross-sectional regressions changes across years.
“the significance of the independent variables varies year to year in the cross sectional regressions.”
Quote in the paperNot a substantial claim - Findingown data
Cross-sectional tests nearly always produce some significant coefficients interpretable as support for the static trade-off theory.
“However, there are almost always significant coefficients that could be read as supporting the static trade-off theory.”
Quote in the paperSubstantial claim - Findingown data
The target adjustment model fits actual debt ratio data.
“As reported earlier, the model fits actual data.”
Quote in the paperSubstantial claim - Findingown data
In the period-average cross-sectional regression, profitability has a significant negative association with debt ratios.
“Note that debt ratios appear to be significantly positively related to the proportion of fixed plant and equipment and negatively related to profitability.”
Quote in the paperNot a substantial claim - Findingnone given
Second-stage R-squared values are much lower than Auerbach's.
“The R2 from this second stage are considerably lower than in Auerbach, however.”
Quote in the paperNot a substantial claim0 of 1 sources checked- cites Auerbach
Not checked in the free run.
- The authors state this as an assumption: The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
- Findingown data
The cross-sectional models' performance is mixed.
“The cross sectional models' performance is mixed.”
Quote in the paperSubstantial claim - Findingown data
Tested on its own, the simple target adjustment model also appears to describe the data well.
“The simple target adjustment model, when tested independently, also seems to be a good descriptor.”
Quote in the paperSubstantial claim - Findingown data
The simple target adjustment model cannot be rejected even when the debt ratio series is a random walk.
“we still fail to reject the simple target adjustment model, even when the series of debt ratios is a random walk!”
Quote in the paperSubstantial claim - Findingown data
The fitted coefficients of the target adjustment models imply rapid movement toward optimal capital structure.
“The fitted coefficients of the target adjustment models (reported below) seem to imply rapid movement toward optimal capital structure.”
Quote in the paperSubstantial claim - Findingown data
Nesting the two models weakens the target adjustment variable's performance.
“When the two models are nested, the coefficient and significance of the pecking order variable change hardly at all; the performance of the target adjustment model's variable degrades.”
Quote in the paperSubstantial claim - Findingown data
Nesting the two models leaves the pecking order variable's coefficient and significance almost unchanged.
“When the two models are nested, the coefficient and significance of the pecking order variable change hardly at all; the performance of the target adjustment model's variable degrades.”
Quote in the paperSubstantial claim - Findingnone given
This result is robust to alternative specifications for the target adjustment rule, including allowances for a moving target.
“This result is robust to alternative specifications for the target adjustment rule including allowances for a moving target.”
Quote in the paperNot a substantial claim - Findingown data
Neither actual nor simulated debt ratios allow a definitive rejection of the static trade-off theory.
“The theory cannot be definitely rejected on either actual or simulated debt ratios.”
Quote in the paperSubstantial claim - Findingnone given
The target adjustment model is biased toward acceptance even when firms follow other financing rules.
“The target adjustment model is biased toward acceptance even when firms follow other financing rules.”
Quote in the paperSubstantial claim - Findingown data
The simulation results are robust across adjustment coefficients from .1 to 1.0 and error variances from 0 to .2, except at very low adjustment coefficient values.
“Our results are robust over these ranges except at very low values of the adjustment coefficient”
Quote in the paperNot a substantial claim - Findingown data
Firms appear to intend to cover expected deficits with debt.
“Our results indicate that firms plan to finance anticipated deficits with debt.”
Quote in the paperSubstantial claim - Findingown data
In the period-average cross-sectional regression, the fixed plant and equipment share has a significant positive association with debt ratios.
“Note that debt ratios appear to be significantly positively related to the proportion of fixed plant and equipment and negatively related to profitability.”
Quote in the paperNot a substantial claim - Findingreasoning
Among the simulated series, only the random walk would be correctly rejected by the cross-sectional test.
“The only series for which this test would correctly reject is the random walk.”
Quote in the paperSubstantial claim - Findingown data
Other proxy variables in that cross-sectional specification have weak coefficients.
“The coefficients on other proxies in this particular specification are weak.”
Quote in the paperNot a substantial claim - Findingnone given
The pecking order is correctly rejected in all cases when an alternative financing rule is imposed.
“The pecking order is correctly rejected in all cases when an alternative financing rule is imposed.”
Quote in the paperSubstantial claim - Findingown data
Even when false, simple target adjustment models often escape rejection.
“Our experiments show that the simple target adjustment models are not rejected even when false; the pecking order, when false, can be easily rejected.”
Quote in the paperSubstantial claim- The authors state this as an assumption: In the pecking-order simulation, positive funds flow deficits lead the firm to issue debt, while negative deficits lead it to retire debt.
- Findingown data
A false pecking order can be rejected with relative ease.
“Our experiments show that the simple target adjustment models are not rejected even when false; the pecking order, when false, can be easily rejected.”
Quote in the paperSubstantial claim - Interpretationreasoning
The apparently good performance of these tests is probably spurious.
“The apparently good performance of these tests is probably spurious.”
Quote in the paperSubstantial claim - Interpretationown data
The results up to the cross-sectional tests increase confidence in the pecking order over the target adjustment model.
“The results so far strongly increase our confidence in the pecking order against the target adjustment model.”
Quote in the paperSubstantial claim - Premisecitation
In the pecking order theory, there is no well-defined optimal capital structure.
“In the pecking order theory, there is no well-defined optimal capital structure.”
- Also stated in: § 1. Introduction · plain
“In Myers's (1984) and Myers and Majlufs (1984) pecking order model there is no optimal debt ratio.”
Quote in the paperSubstantial claim0 of 2 sources checked- cites Myers (1984)
Not checked in the free run.
- cites Myers and Majlufs (1984)
Not checked in the free run.
- Also stated in: § 1. Introduction · plain
- Interpretationreasoning
Because of these features, companies tend to have strings of years with financial deficits followed by strings of surpluses, or vice versa.
“the companies tend to have strings of years with financial deficits, followed by strings of surpluses (or vice versa).”
Quote in the paperSubstantial claim - Interpretationreasoning
Zero-null tests of traditional capital structure theories provide weak evidence.
“This underscores our central theme that tests of the traditional theories on capital structure against a zero null are not persuasive evidence.”
Quote in the paperSubstantial claim - Interpretationreasoning
When the average debt ratio, measured ex post, is taken as the target, the pecking order debt ratios show what appears as mean-reversion.
“When the average debt ratio, measured cx post, is taken as the target, the pecking order debt ratios show (what appears as) mean-reversion.”
Quote in the paperSubstantial claim - Interpretationreasoning
If firms languish for many years below their optimal debt ratios, the static trade-off model cannot have much practical relevance.
“If firms languish for many years below their optimal debt ratios, the static trade-off model can't have much practical relevance.”
Quote in the paperSubstantial claim - Study design and conductreasoning
This bias, if it exists, does not affect the pecking order tests.
“This bias, if it exists, does not affect the pecking order tests.”
Quote in the paperSubstantial claim - Interpretationreasoning
A firm might obey a pure pecking order with no trade-off motive, while standard cross-sectional proxies would still appear to give partial support to trade-off theory.
“a finn could be following a pure pecking order, not driven at all by conventional trade-off considerations, yet cross-sectional tests using reasonable proxies would suggest at least partial acceptance of the trade-off theory of capital structure.”
Quote in the paperSubstantial claim - Interpretationreasoning
The results reinforce confidence in the pecking order as a description of financing behavior.
“On the other hand1 the results reported in this section reinforce our confidence in the pecking order as a description of financing behavior.”
Quote in the paperSubstantial claim - Interpretationreasoning
The observed fit of the pecking order model to real data is not spurious.
“We infer that the fit we observe on real data is not spurious.”
Quote in the paperSubstantial claim- The authors state this as an assumption: In the pecking-order simulation, positive funds flow deficits lead the firm to issue debt, while negative deficits lead it to retire debt.
- Premisecitation
Kester (1986), Titman and Wessels (1988), and Rajan and Zingales (1994) find strong negative relationships between debt ratios and past profitability.
“Second, Kester (1986), Titman and Wessels (1988) and Rajan and Zingales (1994) find strong negative relationships between debt ratios and past profitability.”
Quote in the paperSubstantial claim0 of 3 sources checked- cites Kester (1986)
Not checked in the free run.
- cites Titman and Wessels (1988)
Not checked in the free run.
- cites Rajan and Zingales (1994)
Not checked in the free run.
- Premisecitation
The negative valuation effects of equity issues or leverage-reducing exchange offers do not support the trade-off story.
“First, as pointed out by Myers (1984), the negative valuation effects of equity issues or leverage reducing exchange offers -see Masulis (1980) -do not support the trade-off story.”
Quote in the paperSubstantial claim0 of 2 sources checked- cites Myers (1984)
Not checked in the free run.
- cites Masulis (1980)
Not checked in the free run.
- Interpretationown data
Adjustment-coefficient significance is not conclusive support for target adjustment models.
“Our results suggest that significance of the adjustment coefficients are likewise inconclusive.”
Quote in the paperSubstantial claim- The authors state this as an assumption: The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
- Interpretationown data
A stronger rejection of the zero null would still not necessarily favor the trade-off theory, since the model fits pecking-order and fixed-target-adjustment series about as well.
“However, the rejection of the zero null would not necessarily support the trade-off theory even if it were stronger, since the fit of the model is not appreciably different when applied to the series generated by the pecking order or the simple fixed target adjustment model.”
Quote in the paperSubstantial claim - Interpretationreasoning
The pecking order's strong showing is not merely a short-run result of firms using debt for unexpected cash needs.
“The strong performance of the pecking order does not occur just because firms fund unanticipated cash needs with debt in the short run.”
Quote in the paperSubstantial claim - Interpretationreasoning
Thus target adjustment models generate a misleadingly good fit.
“Thus the target adjustment models generate a misleadingly good fit.”
Quote in the paperSubstantial claim - Interpretationreasoning
Taken together, the findings inspire more confidence in the pecking order than in target adjustment.
“Overall, the results suggest greater confidence in the pecking order than in the target adjustment model.”
Quote in the paperSubstantial claim - Study design and conductown data
The experiments examined just a small number of optimal-capital-structure trade-off specifications.
“Our experiments have considered only a few specifications of the trade-off theoiy of optimal capital structure.”
Quote in the paperNot a substantial claim - Interpretationreasoning
If firms possess a clear optimal capital structure, managers appear largely uninterested in reaching it.
“If companies do have a well-defined optimal capital structure, it seems that managers are not much interested in getting there.”
Quote in the paperSubstantial claim
- May combine two claims. 16
- Classified as probably not a substantial claim. 16
May combine two claims.
Findingown dataIn those alternative specifications, standard errors increase but coefficients remain highly significant.
“Standard errors increase, but coefficients remain highly significant The overall story is unchanged.”
Quote in the paperSubstantial claimMay combine two claims.
Findingown dataWhen the target adjustment and pecking order models are nested using instruments for the anticipated deficit, the target adjustment coefficient is significant but its magnitude is considerably lower than the pecking order variable.
“Once again, although the target adjustment coefficient is significant, its magnitude is considerably lower than the pecking order variable.”
Quote in the paperSubstantial claimMay combine two claims.
Findingown dataIn the basic target adjustment model, the adjustment coefficients are .33 and .41, with R2s of .21 and .25.
“adjustment coefficients of .33 (Column 1) and .41(Column 5).The target is based on sample mean debt ratios for each firm.R2s for the two specifications are .21and .25 respectively.”
Quote in the paperSubstantial claimMay combine two claims.
Findingown dataIn the variance components, time dummy, and autoregressive specifications, the target adjustment coefficient and R2 are reduced, and the pecking order coefficient and R2 also fall but to a lesser extent.
“The target adjustment coefficient and R2 are reduced.The pecking order coefficient and R2 also fall, but to a lesser extent.”
Quote in the paperNot a substantial claimMay combine two claims.
Findingown dataFor gross debt issues, the pecking order coefficient is .85, significantly less than the simple pecking order prediction of 1.0, and the R2 is .86.
“The coefficient is .85,which is the right order of magnitude but significantly less than the simple pecking order prediction of 1.0.The R2 is very high (.86).”
Quote in the paperSubstantial claimMay combine two claims.
Findingown dataThe pecking order model fits actual debt ratio data extremely well but fits the simulated series poorly.
“With the exception of the extremely good fit to actual data, the model fares extremely poorly.”
Quote in the paperSubstantial claim- The authors state this as an assumption: In the pecking-order simulation, positive funds flow deficits lead the firm to issue debt, while negative deficits lead it to retire debt.
May combine two claims.
Findingown dataThe mixed cross-sectional result appears both in year-by-year regressions and in period-average regressions.
“This result emerges when the regressions are run year to year and also when using period averages.”
Quote in the paperNot a substantial claimProbably not a substantial claim: may not pass S3 (load-bearing).
Findingown dataThe R-squared of .20 in the Auerbach model on actual book debt ratios is similar to Auerbach's.
“The R2 of .20 is also similar to Auerbach's, but while our coefficient on lagged tax loss carry forwards has the right sign, it is not significant.”
Quote in the paperNot a substantial claim0 of 1 sources checked- cites Auerbach's (1984)
Not checked in the free run.
- The authors state this as an assumption: The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
Probably not a substantial claim: may not pass S3 (load-bearing).
Findingown dataMost alternative specifications of the moving-target model had similar R-squared values.
“The R2 of most alternative specifications were similar.”
Quote in the paperNot a substantial claimMay combine two claims.
Findingown dataReplicating the Auerbach tests on pecking-order and random-walk debt ratios still strongly supports target adjustment, although second-stage firm-specific coefficient explanations are worse than with actual data.
“Once again the hypothesis of target adjustment is strongly supported even though the explanation of the finn-specific coefficients in the second stage is poorer than with real data.”
Quote in the paperSubstantial claim- The authors state this as an assumption: The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
May combine two claims.
Findingown dataFor actual book debt ratios in the Auerbach model, the estimated adjustment coefficient is .28, statistically significant, and close to Auerbach's .27.
“The adjustment coefficient is .28(corresponding to the negative of the coefficient on lagged debt), which is significant and almost the same as Auerbach's .27.”
Quote in the paperNot a substantial claim0 of 1 sources checked- cites Auerbach's (1984)
Not checked in the free run.
- The authors state this as an assumption: The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
May combine two claims.
Findingown dataThe mean book debt ratio for the 157 firms over 1971 to 1989 is .18, with a standard deviation of .16 and a maximum of .82.
“The mean value of the book debt ratio for the 157 firms over 1971 to 1989 is .18with a standard deviation of .16 and a maximum of .82.”
Quote in the paperNot a substantial claimMay combine two claims.
Findingown dataIn the second stage, asset composition variables carry their predicted signs and are statistically significant.
“As in Auerbach, the asset composition variables shown in Table 7 have the predicted sign and are statistically significant”
Quote in the paperNot a substantial claim0 of 1 sources checked- cites Auerbach
Not checked in the free run.
- The authors state this as an assumption: The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
May combine two claims.
Findingown dataThe lagged tax loss carry-forward coefficient has the expected sign but lacks statistical significance.
“The R2 of .20 is also similar to Auerbach's, but while our coefficient on lagged tax loss carry forwards has the right sign, it is not significant.”
Quote in the paperNot a substantial claim- The authors state this as an assumption: The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
Probably not a substantial claim: may not pass S4 (based).
PremisereasoningFirms whose investment opportunities outrun internally generated funds borrow more and more.
“Firms whose investment opportunities outrun internally generated funds borrow more and more.”
Quote in the paperNot a substantial claimProbably not a substantial claim: may not pass S4 (based). May combine two claims.
PremisereasoningFirms that face a financial deficit will first resort to debt and such firms will be observed later as having higher debt ratios.
“Firms that face a financial deficit will first resort to debt and such firms will be observed later as having higher debt ratios.”
Quote in the paperNot a substantial claimProbably not a substantial claim: may not pass S3 (load-bearing).
InterpretationreasoningThis line of reasoning could easily explain the negative relationship between past profitability and debt ratios.
“This line of reasoning could easily explain the negative relationship between past profitability and debt ratios.”
Quote in the paperNot a substantial claimProbably not a substantial claim: may not pass S4 (based).
PremisereasoningHighly profitable firms with limited investment opportunities work down to low debt ratios.
“Highly profitable firms with limited investment opportunities work down to low debt ratios.”
Quote in the paperNot a substantial claimClassified as probably not a substantial claim.
Premisenone givenModels based on the trade-off of the benefits of debt and the costs of financial distress predict a positive relationship between debt ratios and past profitability.
“Models based on the trade-off of the benefits of debt and the costs of financial distress predict a positive relationship.”
Quote in the paperSubstantial claimClassified as probably not a substantial claim.
PremisereasoningIf changes in debt ratios are movements toward the top of the curve, both increases and decreases in leverage should be value enhancing.
“If changes in debt ratios are movements towards the top of the curve (in Figure 1), both increases and decreases in leverage should be value enhancing.”
Quote in the paperSubstantial claimClassified as probably not a substantial claim. May combine two claims.
PremisecitationIn the Myers-Majluf pecking order model, firms' financing policies follow a hierarchy, with a preference for internal over external finance, and for debt over equity.
“Instead, because of asymmetric information and signalling problems associated with external funding, firms' financing policies follow a hierarchy, with a preference for internal over external finance, and for debt over equity.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Myers and Majlufs (1984)
Not checked in the free run.
Probably not a substantial claim: may not pass S4 (based).
PremisereasoningDebt ratios change when there is an imbalance of internal cash flow, net of dividends, and real investment opportunities.
“Debt ratios change when there is an imbalance of internal cash flow, net of dividends, and real investment opportunities.”
Quote in the paperNot a substantial claimClassified as probably not a substantial claim. May combine two claims.
PremisecitationAccording to prior literature, leverage tends to rise with fixed assets, nondebt tax shields, growth options, and firm size, and to fall with volatility, advertising, R&D, bankruptcy probability, profitability, and product uniqueness.
“These studies generally agree that leverage increases with fixed assets, nondebt tax shields, growth opportunities, and firm size and decreases with volatility, advertising expenditures, research and development expenditures, bankruptcy probability, profitability and uniqueness of product.”
Quote in the paperSubstantial claim0 of 1 sources checked- cites Harris and Raviv (1991)
Not checked in the free run.
Probably not a substantial claim: may not pass S3 (load-bearing).
Study design and conductreasoningSuch a bias might work against the target adjustment specification of the static trade-off hypotheses.
“However, such a bias might work against the target adjustment specification of the static trade-off hypotheses.”
Quote in the paperNot a substantial claimMay combine two claims.
InterpretationreasoningUnder the pecking order, the debt ratio climbs in deficit years and falls in surplus years.
“Under the pecking order the debt ratio climbs in deficit years and falls in surplus years.”
Quote in the paperSubstantial claimProbably not a substantial claim: may not pass S3 (load-bearing).
Study design and conductnone givenThe study's static trade-off specification represents just one among multiple possible treatments and interpretations.
“However, our specification of the static trade-off theory is only one of several possible treatments and interpretations.”
Quote in the paperNot a substantial claimClassified as probably not a substantial claim.
PremisereasoningThe static trade-off theory predicts a cross-sectional relationship between average debt ratios and asset risk, profitability, tax status, and asset type.
“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.”
Quote in the paperSubstantial claimClassified as probably not a substantial claim.
PremisereasoningThe static trade-off theory predicts reversion of the actual debt ratio toward a target or optimum.
“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.”
Quote in the paperSubstantial claimProbably not a substantial claim: may not pass S2 (checkable), S3 (load-bearing).
Study design and conductnone givenThe paper's models are simple.
“First, our models are simple.”
Quote in the paperNot a substantial claim
The authors state this as an assumption.
Real investment is exogenous for the sample firms.
“In this paper, we take real investment as exogenous, because our sample consists of large, public firms, mostly investment grade, most of which should have easy access to the debt market.”
The authors state this as an assumption.
Both the static trade-off and pecking order views assume shareholder wealth maximization as the corporate objective.
“Note, however, that both views assume shareholder wealth maximization as the corporate objective.”
The paper relies on this without support.
For instrument (1), there is enough serial correlation in individual firms' deficits that the lagged deficit is not too bad a predictor of the deficits forecasted by managers.
“Use of instrument (1) hopes that there is enough serial correlation in individual firms' deficits that the lagged deficit is not too bad a predictor of the deficits forecasted by managers.”
The authors state this as an assumption.
In the pecking-order simulation, positive funds flow deficits lead the firm to issue debt, while negative deficits lead it to retire debt.
“The firm is assumed to issue debt if the deficit is positive and retire debt if it is negative.”
The authors state this as an assumption.
The Auerbach model treats the target debt ratio as a linear combination of time- and firm-varying determinants.
“The target ratio d is assumed to be a linear function of determining variables which vary over time and over firms.”
Self-check
Percentages, sums and reported differences re-computed from the paper’s own numbers.
Each contradiction between two passages listed here was confirmed by an independent check.
Table 7 reports a different sample size
MinorThe paper repeatedly describes the sample as 157 firms, but Table 7 says its results cover 175 firms.
“Table 7 t-statistics in parentheses.Results of Estimating a Moving Target Adjustment Model on Actual debt ratios and debt ratios generated by (1) Pecking Onier and (2) a Random Walk for 175 Firms over 1971 to 1989”
“The requirement for Continuous data on flow of funds (which is necessary for our simulation tests) restricts our sample to 157 firms.”
Table 7 gives conflicting definitions of parenthesized numbers
MinorThe Table 7 heading calls the parenthesized numbers t-statistics and also calls them standard errors. Those are different statistics, so both descriptions cannot be correct.
“Table 7 t-statistics in parentheses.”
“(standard errors of coefficients in parentheses.)”
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Valuation effects of corporate debt offerings
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Estimation of linear models with crossed-error structure
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Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data
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Investment Patterns and Financial Leverage
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Dynamic Capital Structure Choice: Theory and Tests
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The Stock Price Effect of Risky Versus Safe Debt
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Flagged first, then by citations
Research works printed but not linked: 2
- Drtina, R. and J. Largay, 1985, Pitfalls in calculating cash flows from operations, Accounting Review, 314.326.
- Myers, S.C. and N. Majluf, June 1984, Corporate financing and investment decisions when firms have information investors do not have, Journal Of Financial Economics 13, 187-221.
Cited by
Sorted by citations
The determinants and implications of corporate cash holdings
Opler, T. (1999) · Journal of Financial Economics · doi:10.1016/s0304-405x(99)00003-3 · Cited by 3,914 · see citing works
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Khoza, F. (2025) · Journal of Risk and Financial Management · doi:10.3390/jrfm18090510 · Cited by 10 · see citing works
- Authors
- Shyam-Sunder, L., & Myers, S.
- Affiliations
- International Finance Corporation (KZ)
- National Bureau of Economic Research (US)
- Venue
- National Bureau of Economic Research
- Publisher
- National Bureau of Economic Research
- Published
- 1994-04
- OpenAlex
- W2025655973
- Semantic Scholar
- 8ecf61595b42ad97df818edecd79e1b1719e02a5
- Cited by
- 1,165
- References
- 27
- Citations by year
- 2026: 1 · 2025: 18 · 2024: 27 · 2023: 40 · 2022: 33 · 2021: 46 · 2020: 63 · 2019: 44 · 2018: 65 · 2017: 55 · 2016: 65 · 2015: 69 · 2014: 64 · 2013: 71 · 2012: 62
- Type
- report
- Language
- en
- Open access
- green
- doi.org
- Locations
- National Bureau of Economic Research (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- National Bureau of Economic Research (submittedVersion)
- DSpace@MIT (Massachusetts Institute of Technology) (submittedVersion, cc-by-nc)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
- Social Sciences › Business, Management and Accounting › Accounting › Financial Distress and Bankruptcy Prediction
- Keywords
- capital structure, pecking order theory, trade-off theory, optimal debt ratio, external financing, corporate finance, debt financing
About these checks
Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.
Claims read by deepseek-v4.1-flash under definition version 3 (extract-v3) on 2026-10-05.
Classified by jev-1.13-20260917 (gold-guideline-v0.2) on 2026-10-05.
Statistics and arithmetic are recomputed, not judged.
Confidence bands are shown only for fields calibrated on our annotated test set. None is calibrated yet, so no band is shown.
What counts as a claim ›How we measure confidence ›How we check this ›
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