Capital Structure: New Evidence of Optimality and Pecking Order Theory

In 1984, Stewart Myers proposed his Pecking Order Theory, which states that the firm has no well-defined target debt-to-value ratio, and thatfirmsin generalpreferinternal financing (first), then external debt-financing (second), and external equity financing (third). Bowen, Daley and Huber, Jr.(1982) theorized that individual firm\u27s debt structures tend to converge to the industry mean over time. The objective of a paper is to analyze empirically whether firms do converge toward the optimal capital structure (that is, the industry mean) over time or follow the Pecking Order Theory as expounded by Myers. A new data set is used, and the existing methodology has been improved. The results indicate that both the optimal capital structure hypothesis and the pecking order hypothesis coexist