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Determinants Of Debt And Dividend Decisions: Trade-Off Vs Pecking Order, Caitlin A. Farrell

Theses & Honors Papers

This study tests the trade-off and pecking order theories about the dividend and debt decisions for stock firms. The decision of a firm to use debt to finance investment opportunities is important since the firm's choice between debt or equity determines the optimal capital structure. Under the trade-off theory, there is some optimal balance between debt and equity, and the firm will use debt until the cost of taking on more debt is more expensive than the cost of issuing equity. The firm uses internal fonds first under the pecking order theory, and then if more financing is needed, the …