Trade-off Theory vs Pecking Order Theory Revisited

Abstract

This article empirically tests the two competing theories of capital structure: Trade-off theory against Pecking Order theory using the time series hypothesis. This study is performed for an emerging market context taking the case of Indian firms with a sample from 10 industries for the period 1990 to 2007. Our results support the evidence of trade-off theory in the Indian firms (contrary to the results found by Farhat, Cotei and Abugri 2006). The result is consistent for the overall sample as well as for different industries separately. JEL Classification: G32, C23, C33