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.

In their classic paper, Rothschild and Stiglitz (1976) analyze a competitive insurance market under asymmetric information with two policyholder risk types, or probabilities of having a fixed loss amount. Their model is a screening model where uninformed insurers move first offering a menu of contracts, defined as price-quantity pairs, to informed policyholders. They

(Preliminary and incomplete)