Pecking Order Versus Trade Off Theory and the Issue of Debt Constraint Problem?
29 Pages Posted: 2 Sep 2012
Date Written: September 1, 2012
Abstract
This paper presents a new test investigating competing capital structure theories. Our test was performed more particularly on a sample of French quoted firms. The question is which one of pecking order or trade off theory can be considered as a better first order explanation for firms’ behaviors. This test seeks to shed some new light on the issue of debt constraint problem and its effects. We use both linear and un-linear specifications of the relationship between the firm’s debt variation and financial deficit to deal with this difficulty. In the classical linear context, our findings show that trade off theory dominates pecking order for constrained firms whereas pecking order dominates trade off theory for unconstrained ones. However, we will show the introduction of that un-linear specifications improves pecking order adjustment and makes it difficult to distinguish which theory better fits.
Keywords: Capital structure, Trade off theory, Pecking order theory, debt constraint
JEL Classification: G32
Suggested Citation: Suggested Citation