To have a target debt ratio or not: what difference does it make?
The static tradeoff theory of capital structure predicts that firms aim to approach a target debt ratio. The theory provides several firm characteristics that determine this target ratio. In contrast, the pecking order model rejects a target debt ratio, because firms are expected to
finance investments subsequently from (internal) equity, debt and (external) equity. A fundamental problem in empirical studies is that having a target debt ratio or not is unobservable from public data. We use survey evidence from 235 Chief Financial Officers (CFOs) to discriminate static
tradeoff firms from pecking order firms and relate the responses to public data. For the two sets of firms we estimate standard capital structure models and find that pecking order firms contaminate static tradeoff theory-based estimations.
Document Type: Research Article
Affiliations: 1: RSM Erasmus University, 3000 DR Rotterdam, The Netherlands,Faculty of Economics and Business, Department of Accounting, University of Groningen, 9700 AD Groningen, The Netherlands 2: Faculty of Economics and Commerce, Department of Finance, University of Melbourne, Parkville, Victoria 3010, Australia
Publication date: 01 February 2010
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