Trade-Off and Pecking Order Theories of Debt*
Murray Z. Frank Carlson School of Management, University of Minnesota
Vidhan K. Goyal Department of Finance, Hong Kong University of Science and Technology
Abstract
Taxes, bankruptcy costs, transactions costs, adverse selection, and agency conflicts have all been advocated as major explanations for the corporate use of debt financing. These ideas have often been synthesized into the trade-off theory and the pecking order theory of leverage. This chapter reviews these theories and the related evidence and identifies a number of important empirical stylized facts. To understand the evidence, it is important to recognize the differences among private firms, small public firms, and large public ...
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