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Testing Trade-Off and Pecking Order Predictions About Dividends and Debt

  • Eugene F. Fama

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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Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 15 (2002)
Issue (Month): 1 (March)
Pages: 1-33

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Handle: RePEc:oup:rfinst:v:15:y:2002:i:1:p:1-33
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