This paper suggests that the validity of the trade-off (TOT) and pecking-order (POT) theories in explaining financing decisions varies among small, medium and large firms.
Using dynamic panel data tests in a sample of 3,439 Spanish firms over the period 1995-2003, results are partially consistent with both explanations but suggest a greater validity of pecking-order predictions for small firms. In small firms, the negative influence of profitability and the positive influence of investment opportunities and of intangible assets on firm debt predicted by the POT are heightened. However, no differences are observed between small and large firms in their speed of adjustment to the target leverage as suggested by the TOT.
JEL classification: G32.