Confirming predictions shared by the trade-off and pecking order models, more profitable firms and firms with fewer investments have higher dividend payouts. Confirming the pecking order model but contradicting the trade-off model, more profitable firms are less levered. Firms with more investments have less market leverage, which is consistent with the trade-off model and a complex pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment. As the pecking order model predicts, short-term variation in investment and earnings is mostly absorbed by debt.

Journal Article Testing Trade-Off and Pecking Order Predictions About Dividends and Debt Get access Eugene F. Fama, Eugene F. Fama University of Chicago Address correspondence to Eugene F. Fama, Graduate School of Business, University of Chicago, 1101 East 58th St., Chicago, IL 60637, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar Kenneth R. French Kenneth R. French Dartmouth College Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 15, Issue 1, January 2002, Pages 1–33, https://doi.org/10.1093/rfs/15.1.1 Published: 16 June 2015