ABSTRACT
The optimal capital structure theory evolved through the writings of Franco Modigliani and Merton Miller (MM). In 1982 Bowen, Daley and Huber, Jr. had provided a technique by which can test the optimal capital structure. They proposed that an individual firm's debt structure tends to converge to its industry mean over time. To examine whether firms converge their capital structure toward their industry mean, the two-by-two matrix was analyzed for each year and each industry in the following manner: the hypothesis tested by this procedure is that gamma is significantly different from zero. Taggart used pecking order theory in his study of capital structure and found that the pecking order hypothesis was more valid than the optimal capital structure hypothesis. In general, in more firms with the industry mean long-term debt ratios adjusted toward the industry mean than with the industry mean ratios.
