Handbook of Empirical Corporate Finance

Chapter 12 TRADE-OFF AND PECKING ORDER THEORIES OF DEBT^*

MURRAY Z. FRANK

Carlson School of Management, University of Minnesota

VIDHAN K. GOYAL

Department of Finance, Hong Kong University of Science and Technology

Contents

Abstract

Keywords

1. Introduction

2. Theory

2.1. Kinds of theories

2.2. The Modigliani-Miller theorem

2.3. The trade-off theory

2.3.1. The static trade-off theory

2.3.2. The dynamic trade-off theory

2.4. The pecking order theory

2.4.1. Adverse selection

2.4.2. Agency theory

3. Evidence

3.1. Financing decisions at the aggregate level

3.1.1. Balance sheet

3.1.2. Cash flow statements

3.1.3. Holdings of corporate financial claims

3.1.4. Flows of corporate financial claims

3.2. Leverage differences between firms

3.2.1.