Testing the Trade-Off and Pecking Order Theories: A Dynamic Panel Framework

Viet A. Dang

《Advances in Financial Planning and Forecasting》 4期 (2011/03) Pp. 263-306

https://doi.org/10.6292/AFPF.2011.04.10

並列摘要

The main purpose of this paper is to empirically examine the trade-off and pecking order theories of capital structure. In testing the trade-off theory, we extend a partial adjustment model to an error correction model. In doing so, it explicitly models the deviation from target leverage, as well as the target leverage change as potential determinants of dynamic leverage adjustment. These two models are further augmented to nest the pecking order theory and estimated by using both the instrumental variable and the generalised methods of moments estimators. We find that these estimators are important because they help improve the consistency and efficiency of the estimation results.
Using a large U.K. dataset, the paper finds strong, consistent evidence for the trade-off theory in both the partial adjustment and error correction models. It shows that U.K. firms adjust their leverage towards the target relatively quickly, with a half of the deviation from target leverage being closed per year. The trade-off theory outperforms the pecking order theory in empirical models nesting the two theories.

並列關鍵字

Capital structure ； Trade-off theory ； Pecking order theory ； Partial adjustment model ； Error correction model ； Dynamic panel data

參考文獻

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