This study examines the static trade-off theory and pecking order theory of capital structure using data from 279 companies on the Tehran Stock Exchange over 5 years. The static trade-off theory posits that firms seek an optimal capital structure that balances the costs and benefits of debt, while the pecking order theory states that firms prioritize internal financing and use debt over equity when external funds are needed. The results show that neither theory fully explains the capital structures. However, evidence is found for the static trade-off theory when analyzed by industry, supporting the importance of industry in financing decisions per the pecking order theory. The conclusions differ from some prior studies but are consistent with others that found more support for the static

1. Archive of SID
Extended Abstracts of the Persian Articles in English 21
Journal of Accounting Advances (J.A.A)
Vol. 2, No. 2, Fall & Winter 2010, Ser. 59/3
Extended Abstract
Testing the Static Trade-off and Pecking Order Theories in
Capital Structure of TSE Accepted Companies
Dr. F. Nasirzadeh A. R. Mostaqiman
Ferdowsi University of Mashhad
Introduction
This study examines two theories including static trade-off and
pecking order theories which belong to the capital structure’s theories.
According to static trade-off theory, firms are searching for an optimum
capital structure which maximizes the corporate value. Regarding this
theory, firms ask for establishing a balance between benefits and cost of
issuing the debts. The benefits of issuing the debts would be the tax
deductibility of the interest and conflict decreasing between the
shareholders and managers. On the other hand, the cost of issuing the
debts would comprise potential bankruptcy cost and conflict between the
shareholders and creditors. According to the pecking order theory,
regardless to leverage optimal, financing decision through the internal
funds would be the priority for firms, and when the internal funds are not
enough, they use the external funds; in the meantime, they prefer issuing
the debts to issuing the shares.
Research questions or Hypotheses
First hypothesis: capital structure model of TSE accepted companied
can be defined by static trade-off theory.
Second hypothesis: capital structure model of TSE accepted
companied can be defined by pecking order theory.
Undoubtedly, the acceptance of each of these theories does not
necessarily mean another’s rejection.
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2. Archive of SID
22 Journal of Accounting Advances (J.A.A)
Methods
Statistical community of this study includes all TSE accepted
companies and the examined sample includes 279 companies from 21
various industries. Thereafter, the data of 279 companies for the period of
5 years from 2002 to 2006 is being analyzed. The nature of data is
compound in this study, a combination of time series and cross sectional
data. The data are analyzed by the descriptive statistical methods, and for
testing the hypotheses, time series cross sectional regression is used.
Results
Results show that none of these theories can explain company’s
capital structure. Nevertheless, the evidences are of the static trade-off
theory. Testing the given hypotheses based on the industry shows the
confirmation of the pecking order theory which emphasizes the
importance of industry kind in order to determine the companies’
financing decision behavior.
Discussion and conclusion
Results indicate a positive significant relationship between the long-
term debt changes of studied companies and the required adjustment in
order to gain the optimal leverage. In other words, the studied companies
have tried to reach the long-term debts to the industry average debt which
support the static trade-off theory. However, these conclusions cannot be
generalized to all industries since there are just 12 studied industries in
which the first hypothesis is accepted. The conclusions which result from
the static trade-off theory differ from Sunder and Myers’ (1998)
confirming the pecking order theory. Even though, the results are of the
Flannery and Rangan’s (2006); and are of the Bagherzadeh’s researches
in Iran which confirm the static trade-off theory more.
Keywords: Capital Structure, Determinant of Capital Structure, the
Static Trade-off Theory, the Pecking Order Theory, Optimal Leverage.
JEL: G32
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