In a recent paper, Shyam-Sunder and Myers (1999) introduce a new test of the Pecking Order Model. This comment shows that their elegantly simple test generates misleading inferences when evaluating plausible patterns of external financing. Our results, coupled with the power problem with the Static Tradeoff Model documented by Shyam-Sunder and Myers, indicate that their empirical evidence can evaluate neither the Pecking Order nor Static Tradeoff Models. Alternative tests are needed that can identify the determinants of capital structure and can discriminate among competing hypotheses.

Market power exercised by firms has become central to macroeconomics. Recent theoretical work highlights the importance of the relation between market power and inflation. We examine this relation for individual firms in eleven U.S. industries. Our econometric framework exploits restrictions from dynamic theory and information from financial markets to generate quantitative evidence on the responsiveness of market power to inflation. We find that inflation usually has a positive effect on market power. This relation is heterogeneous across the eleven industries, and statistically significant positive relations are concentrated in industries with little market power.