Testing Static Trade Off Against Pecking Order Models of Capital Structure
Testing Static Trade Off Against Pecking Order Models of Capital Structure
Lakshmi Shyam Sunder
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The seed value as before is the 1971 book debt ratio for each firm and a random series of book debt ratios is 15 generated with reflecting barriers at and 1. 0 and variances ranging from to 2^^. The resuhs reported are for a variance of . 10. The fitted models Panel A of Table 5 shows the results of fitting the pecking order model to the various series. With the exception of the extremely good fit to actual data, the model fares extremely poorly. We infer that the fit we observe on real data is... not spurious. Panel B shows the results of fitting the target adjustment model to the various series. As reported earlier, the model fits actual data. It fits the peckirg order series equally well! While the results are somewhat weaker for the other series, we still fail to reject the simple target adjustment model, even when the series of debt ratios is a random walk! Cross sectional tests The results so far strongly increase our confidence in the pecking order against the target adjustment model.
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