European Journal of Economics, Finance and Administrative...

European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 11 (2008)  © EuroJournals, Inc. 2008 http://www.eurojournalsn.com Testing Capital Structure Theories: Are the Models’ Assumptions Correctly Specified? Carmen Cotei Department of Economics, Finance and Insurance University of Hartford, 200 Bloomfield Ave., West Hartford, CT, 06117, USA E-mail: cotei@hartford.edu Joseph Farhat Department of Finance Central Connecticut State University, 1615 Stanley St., New Britain, CT 06050, USA E-mail: farhatjob@ccsu.edu Abstract In this study, we investigate the models used in testing the trade-off and pecking order theories. Specifically, we examine the symmetric behavior assumption and homogeneous coefficient†¦show more content†¦The pecking order model assumes that the distribution of informational asymmetry is homogeneous across different industries. To examine the adequacy of the two assumptions under each theory, first we classify firms into industries, using Fama and French industry classification; this enables us to control for the nonhomogeneity of the firms’ characteristics across industries and the temporal distribution of informational asymmetry among industries; second, we use a spline regression model to test for the symmetric behavior assumption. The results show that the symmetrical rate of adjustment assumption under the trade-off model is rejected across all industries; firms tend to adjust faster toward the target leverage when they are above the target relative to when the y are below the target leverage. We find no evidence to support the homogeneous coefficient across industries as the adjustment rate varies significantly across industries. For the pecking order model, we reject the symmetric behavior assumption at the industry level as well as across all industries. Firms have the tendency to reduce debt by a significantly higher proportion when they have financing surplus comparing to the proportion of debt issued when they have financing deficit. 2. The Trade-Off Theory The trade-off models have dominated the capital structure literature. The taxShow MoreRelatedBudget and Budgetary Control for Improved Performance: a Consideration for Selected Food and Beverages Companies in Nigeria4782 Words   |  20 PagesEuropean Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 12 (2008)  © EuroJournals, Inc. 2008 http://www.eurojournalsn.com Budget and Budgetary Control for Improved Performance: A Consideration for Selected Food and Beverages Companies in Nigeria Ishola Rufus Akintoye Room 116, Department of Economics, Faculty of the Social Sciences University of Ibadan, Oyo State, Nigeria, West Africa Tel: 234-8035369293, 8082130269 E-mail: irakintoye@yahoo.com Abstract Budget andRead MoreInternational Human Resource Management3727 Words   |  15 PagesEuropean Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 29 (2011)  © EuroJournals, Inc. 2011 http://www.eurojournals.com Current Trends and Future Directions of Human Resource Management Practices: A Review of Literature Ogunyomi, O. 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