Testing static tradeoff against pecking order models of capital structure in Japanese firms

Purpose – The purpose of this paper is to test static tradeoff against pecking order models of capital structure in Japanese firms. Design/methodology/approach – The static tradeoff and pecking order models are tested on a sample of 1,325 non-financial Japanese firms between 2002 and 2006. Findings – Empirical results prove that both models can explain some part of the capital structure. The static tradeoff model shows that firm leverage is affected by several determinants, and the pecking order model displays similar movements between net debt retired and financial surplus. However, both models have shortcomings. The static tradeoff model fails to explain the negative correlation between profitability and firm leverage, and the pecking order model fails to explain the low deficit coefficient. Originality/value – The paper, because of the inconsistent results in prior studies, tests static tradeoff against pecking order models, with the data of Japanese firms.