Abstract
I test the trade-off and pecking order theories using both established tests from the literature and new tests. The main contributions of this paper are the new tests of financing of operating net assets (for the pecking order theory), the mean reversion tests (for the trade-off theory) and the test of mean reversion and trends. These tests allow for extended conclusions on the validity of the pecking order versus the trade-off theory. The trade-off theory is validated in standard tests, as well as in the new tests. I reject the asymmetric information based empirical predictions of the pecking order theory, but not the profitability based empirical predictions. The conclusion from the pecking order tests is that firms' capital structure has more to do with their historical profitability (return on equity) than the solution to an asymmetrical information problem.