Is there Optimality in Firms Capital Structure? An Empirical Study

Abstract

The paper reports that, when firms follow the Pecking Order Theory, a sub-optimality with the cost components of firm 'capital structure exists. The sub-optimality ives firms to follow the Trade - Off Theory to reach optimality concerning the cost components of capital structure. At higher LTD/EqR 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.