Corporate Debt Behavior in South Africa: Pecking Order or Target Adjustment?

Traditional trade off models of capital structure advocated that the gains from leverage be balanced against the potential costs of distress and bankruptcy. More recent studies however show that the trade off theory does not fully explain the behavior of South African managers. Using JSE industrial sector data, this paper replicates the Shyam-Sunder and Myers (1999) work to identify whether trade off theory or pecking order theory explains the behavior of South African managers better. Results indicated that both models are useful, but pecking order dominates the target adjustment model for small sized firms.