If the primary purpose of raising debt levels was to finance growth opportunities, then higher debt levels would signal greater post-payout returns on assets but contain no information about firm leverage. Using annual data in real terms for more than 5,400 public US non-financial firms from...

The static tradeoff theory of capital structure predicts that firms aim to approach a target debt ratio. The theory provides several firm characteristics that determine this target ratio. In contrast, the pecking order model rejects a target debt ratio, because firms are expected to finance...