Testing Trade-Off and Pecking Order Predictions About Dividends and Debt
The Society for Financial Studies
Testing Trade-Off and Pecking Order Predictions about Dividends and Debt Author(s): Eugene F. Fama and Kenneth R. French Reviewed work(s): Source: The Review of Financial Studies, Vol. 15, No. 1 (Spring, 2002), pp. 1-33 Published by: Oxford University Press. Sponsor: The Society for Financial Studies. Stable URL: http://www.jstor.org/stable/2696797 . Accessed: 16/02/2012 01:28
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Testing Trade-Off and Pecking Order Predictions About Dividends and Debt
Eugene F. Fama University of Chicago Kenneth R. French Dartmouth College
Confirmingpredictionssharedby the trade-offand pecking ordermodels, more profitable firms and firms with fewer investments have higher dividend payouts. Confirmingthe pecking ordermodel but contradictingthe trade-offmodel, more profitablefirms are less levered. Firms with more investmentshave less marketleverage, which is consistent with the trade-off model and a complex pecking order model. Firms with more investments have lower long-termdividendpayouts,but dividendsdo not vary to accommodateshortterm variationin investment.As the pecking order model predicts, short-termvariation in investmentand earnings is mostly absorbedby debt.
The finance literature offers two competing models of financing decisions. In the
Testing Trade-Off and Pecking Order Predictions about Dividends and Debt Author(s): Eugene F. Fama and Kenneth R. French Reviewed work(s): Source: The Review of Financial Studies, Vol. 15, No. 1 (Spring, 2002), pp. 1-33 Published by: Oxford University Press. Sponsor: The Society for Financial Studies. Stable URL: http://www.jstor.org/stable/2696797 . Accessed: 16/02/2012 01:28
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Oxford University Press and The Society for Financial Studies are collaborating with JSTOR to digitize, preserve and extend access to The Review of Financial Studies.
http://www.jstor.org
Testing Trade-Off and Pecking Order Predictions About Dividends and Debt
Eugene F. Fama University of Chicago Kenneth R. French Dartmouth College
Confirmingpredictionssharedby the trade-offand pecking ordermodels, more profitable firms and firms with fewer investments have higher dividend payouts. Confirmingthe pecking ordermodel but contradictingthe trade-offmodel, more profitablefirms are less levered. Firms with more investmentshave less marketleverage, which is consistent with the trade-off model and a complex pecking order model. Firms with more investments have lower long-termdividendpayouts,but dividendsdo not vary to accommodateshortterm variationin investment.As the pecking order model predicts, short-termvariation in investmentand earnings is mostly absorbedby debt.
The finance literature offers two competing models of financing decisions. In the
References: Fama, E. F., 1974, "The Empirical Relationships between the Dividend and Investment Decisions American Economic Review, 64, 304-318. Fama, E. F., and K. R. French, 2001, "Disappearing Dividends: Propensity to Pay?," Journal of Financial Economics, 60, 3-43.