Abstract
ABSTRACT Myers (1984) proposed the modified pecking order (MPO) theory of capital structure as an alternative to the static trade-off theory of capital structure. Based on the MPO theory, a hypothesis was proposed that an unusually profitable firm in a slow-growing industry would have an unusually low debt ratio compared to its industry's average and will remain so over time. The rationale behind this hypothesis is that profitable firms in a slow-growing industry have lower cumulative requirements for external financing and want to maintain their financial slack or borrowing capacity. Therefore, they may select a lower target leverage ratio over time.
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