This paper tests traditional capital structure models against the pecking order model, which predicts that firms prioritize internal financing over external debt when there is a financial deficit. The authors find that the pecking order model has significantly greater explanatory power than the static trade-off model, which predicts that firms adjust towards an optimal debt ratio. They show that the power of standard tests for the static trade-off model is limited and question the evidence supporting the notion of an optimal debt ratio. The paper uses a sample of 157 large, public firms and employs various regression models to test the pecking order and static trade-off hypotheses. The results consistently support the pecking order model, while the static trade-off model appears to fit well even when the pecking order is the underlying financing behavior. The authors conclude that the pecking order is a more robust explanation for firms' debt choices and suggest that the concept of an optimal debt ratio may be overemphasized in the empirical literature.This paper tests traditional capital structure models against the pecking order model, which predicts that firms prioritize internal financing over external debt when there is a financial deficit. The authors find that the pecking order model has significantly greater explanatory power than the static trade-off model, which predicts that firms adjust towards an optimal debt ratio. They show that the power of standard tests for the static trade-off model is limited and question the evidence supporting the notion of an optimal debt ratio. The paper uses a sample of 157 large, public firms and employs various regression models to test the pecking order and static trade-off hypotheses. The results consistently support the pecking order model, while the static trade-off model appears to fit well even when the pecking order is the underlying financing behavior. The authors conclude that the pecking order is a more robust explanation for firms' debt choices and suggest that the concept of an optimal debt ratio may be overemphasized in the empirical literature.