We test the dividend and leverage predictions of the tradeoff and pecking order models. As both models predict, more profitable firms have higher long-term dividend payouts, and firms with more investments have lower payouts. Confirming the pecking order model but contradicting the tradeoff model, more profitable firms are less levered. Firms with more investment opportunities are also less levered, which is in line with the tradeoff model and a complex version of the pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment. Confirming the pecking order model, short-term variation in investment and earnings is mostly absorbed by variation in debt. * Graduate School of Business, University of Chicago (Fama) and Sloan School of Management, MIT (French). The finance literature offers two competing models of financing decisions. In the tradeoff model, firms identify their optimal l...

We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues trackthe financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.

Cochrane, in particular, gave me the best paper comments I have received in my career. Gerard Hoberg provided terrific research assistance. The author’s current web page is

This paper provides new evidence of how macroeconomic conditions affect capital structure choice. We model firms ’ target capital structures as a function of macroeconomic conditions and firm-specific variables. We split our sample based on a measure of financial constraints. We find that target leverage is counter-cyclical for the relativelyunconstrained sample, but pro-cyclical for the relativelyconstrained sample. The choice of what type of security to issue/repurchase is significantly related to deviations from the target capital structure, particularly for the constrained sample. Macroeconomic conditions are significant for issue choice for unconstrained firms but less so for constrained firms. Our results support the hypothesis that unconstrained firms are able to time their issue choice to periods when macroeconomic conditions are favorable, while constrained firms take what they can get.

Financing decisions seem to violate the central predictions of the pecking order model about how often and under what circumstances firms issue equity. Specifically, most firms issue or retire equity each year, the issues are on average large, and they are not typically done by firms under duress. We estimate that during 1973-2002 the year-by-year equity decisions of more than half of our sample firms violate the pecking order.

This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs/benefits associated with firm credit rating level differences, and tests whether concerns for these costs/benefits directly affect debt and equity financing decisions. The tests find that firms near a rating upgrade or downgrade issue less debt relative to equity than firms not near a rating change. This behavior is consistent with discrete costs/benefits of rating changes, but not explained by traditional capital structure theories. The results persist in the context of previous empirical tests of the pecking order and tradeoff capital This paper examines to what extent credit ratings directly affect capital structure decision making by financial managers. The paper outlines the reasons why credit ratings may be relevant for managers in the capital structure decision process, and then empirically tests the extent to which credit rating concerns directly impact managers ’ debt and equity decisions. The paper also

I would like to thank seminar participants at Baruch College and SUNY Binghamton for helpful comments. Are Observed Capital Structures Determined by Equity Market Timing? Contrary to Baker and Wurgler (2002), we find that the importance of historical average market-to-book in leverage regressions is not due to past equity market timing. We find that though equity transactions may be timed to equity market conditions, they do not have significant long-lasting effects on capital structure. Debt transactions exhibit timing patterns that are unlikely to induce a negative relation between market-to-book and leverage. We also find that historical average market-to-book has a significant effect on current financing and investment decisions, implying that it contains information about Traditional theories of corporate financing explain firms ’ financing choices as either the result of the fundamental trade-offs between various costs and benefits of debt and equity

There are relatively few direct tests of the economic effects of asymmetric information because of the difficulty in identifying exogenous information measures. We propose a novel exogenous measure of information based on the quality of property tax assessments in different regions and apply this to the U.S. commercial real estate market. We find strong evidence that information considerations are significant. Market participants resolve information asymmetries by purchasing nearby properties, trading properties with long income histories, and avoiding transactions with informed professional brokers. The evidence that the choice of financing is used to address information concerns is mixed and weak. We thank Michael Arabe, John Edkins, and Peggy McNamara as well as COMPS.com for providing commercial real estate data. We are grateful to Stephen Cauley for his assistance and advice and have benefitted from the

JEL Classification: G32 © 2001 SUERF, Vienna

This paper argues that the standard pecking order hypothesis is only a special case of the adverse selection argument about external financing. It only applies when there is no asymmetric information about risk so that there is no adverse selection cost of debt. As soon as outside investors are imperfectly informed about risk, debt, a concave claim, will be mispriced. Using a large unbalanced panel of publicly traded US firms, we present robust and economically significant evidence i) that there is a general adverse selection in which firms issue consistently more equity and less debt if risk matters more and ii) that the special case of the pecking order, i.e. no adverse selection cost of debt, works well when risk does not matter, irrespective of firms ’ age, size, market-to-book ratio, tangibility or the time period. We thank Heitor Almeida, Dan Bergstresser, Kobi Boudoukh, Alexander Ljungqvist, Eli Ofek, Daniel Wolfenzon, Jeff Wurgler and seminar participants at NYU for helpful comments.- 0-The pecking order theory of capital structure, one of the most influential theories of corporate leverage, has recently fallen on hard times. On the one hand, the theory has considerable intuitive appeal. Firms seeking outside finance naturally face an adverse