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Testing Tradeoff and Pecking Order Predictions about Dividends and Debt.”

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  • EUGENE F. FAMA
  • KENNETH R. FRENCH

Abstract

Confirming predictions shared by the trade-off and pecking order models, more profitable firms and firms with fewer investments have higher dividend payouts. Confirming the pecking order model but contradicting the trade-off model, more profitable firms are less levered. Firms with more investments have less market leverage, which is consistent with the trade-off model and a complex pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment. As the pecking order model predicts, short-term variation in [oplus ]investment and earnings is mostly absorbed by debt. Copyright 2002, Oxford University Press.

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Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 506.

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Handle: RePEc:wop:chispw:506

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