This article tests the trade-off theory against the pecking-order theory of corporate financing behavior on a panel data set of publicly traded Japanese firms for 1964 to 2005. Comparing the explanatory powers for both the trade-off and the pecking-order models, we find the following. First, for the financing behavior of Japanese firms, the pecking-order model has much greater explanatory power than the trade-off model, while both models are still statistically significant. Second, running the quantile regressions, which allow for the non-normal conditional distribution of the dependent variable, the behavior of most Japanese firms is strongly consistent with the pecking-order prediction. In this sense, the financing behavior of most Japanese firms obeys the pecking-order theory, and this tendency holds for almost the entire period after 1964. The pecking-order theory has no well-defined optimal capital structure, and the meanings of interest tax shields or the costs of financial distress are assumed to be second-order. This means that the financing behavior of Japanese firms is driven mainly by the need for external funds, not by the adjustment to an optimal capital structure.
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