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Testing static tradeoff against pecking order models of capital structure in Japanese firms

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  • Rongrong Zhang
  • Yoshio Kanazaki
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    Abstract

    Purpose – The purpose of this paper is to test static tradeoff against pecking order models of capital structure in Japanese firms. Design/methodology/approach – The static tradeoff and pecking order models are tested on a sample of 1,325 non-financial Japanese firms between 2002 and 2006. Findings – Empirical results prove that both models can explain some part of the capital structure. The static tradeoff model shows that firm leverage is affected by several determinants, and the pecking order model displays similar movements between net debt retired and financial surplus. However, both models have shortcomings. The static tradeoff model fails to explain the negative correlation between profitability and firm leverage, and the pecking order model fails to explain the low deficit coefficient. Originality/value – The paper, because of the inconsistent results in prior studies, tests static tradeoff against pecking order models, with the data of Japanese firms.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal International Journal of Accounting and Information Management.

    Volume (Year): 12 (2007)
    Issue (Month): 2 (June)
    Pages: 24-36

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    Handle: RePEc:eme:ijaipp:v:15:y:2007:i:2:p:24-36

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    Related research

    Keywords: Capital structure; Japan;

    References

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    1. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
    4. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02.
    5. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    7. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    8. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    9. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
    10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    11. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
    12. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    13. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
    14. Baltagi, Badi H. & Chang, Young-Jae, 1994. "Incomplete panels : A comparative study of alternative estimators for the unbalanced one-way error component regression model," Journal of Econometrics, Elsevier, vol. 62(2), pages 67-89, June.
    15. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    16. Chirinko, Robert S. & Singha, Anuja R., 2000. "Testing static tradeoff against pecking order models of capital structure: a critical comment," Journal of Financial Economics, Elsevier, vol. 58(3), pages 417-425, December.
    17. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    Cited by:
    1. Mazlina Mustapha Author_Email: mazlina05@gmail.com & Hashanah Bt Ismail & Badriyah Bt Minai, 2011. "Determinants Of Debt Structure: Empirical Evidence From Malaysia," 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding 2011-490, Conference Master Resources.

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