Is There Optimality in Firm's Capital Structure? : An Empirical Study

The paper reports that, when firms follow the Pecking Order Theory, a sub-optimality with the cost components of firms' capital structure exists. The sub-optimality drives firms to follow the Trade-Off Theory to reach optimality concerning the cost components of capital structure. At higher Ltd/Eq. ratios firms follow the Pecking Order financing and subsequently change the capital structure due to the interplay of profitability, cost of financing and influence of financing on profitability