Testing Trade-Off and Pecking Order Predictions About Dividends and Debt. (16th June 2015)

• Record Type: Journal Article
• Authors: Fama, Eugene F.; French, Kenneth R.
• Is Part Of: Review of financial studies. Volume 15:Number 1(2002)
• Page Start: 1
• Page End: 33
• Publication Date: 2015-06-16
• Subjects: Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/15.1.1
• Languages: English
• ISSNs: 0893-9454

Abstract

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 investment and earnings is mostly absorbed by debt.