Alternative Theories of Capital Structure (original) (raw)

A Critical Literature Review of Capital Structure Theories

American Based Research Journal, 2019

Capital structure is a vital component of any business entity. The success and or failure of many business enterprises arise from their capital structures. Many financial institutions adopt different approaches regarding their capital structure arrangement. Some depend entirely on debt financing, others depend more on equity financing and others still mix the two approaches. The question has been which capital structure is the best for financial institutions? For those firms which prefer mixing the two approaches, what would be the best portion for the two approaches? This paper critically reviews the capital structure theories, which include Franco Modigliani and Merton Miller theorem, Trade-off theory of capital structure and taxes, Pecking order theory, The market timing theory and Agency cost theory. This paper suggests that any financial institution should carefully analyze its operations before making its capital structure decision

Overview of Capital Structure Theory

Studies in Business and Economics, 2014

The aim of this paper is to provide a comprehensive review on two major theories of capital structure; pecking order theory and static-trade off theory in regard with achieving an optimal capital structure. Researchers believed bankruptcy costs, transactions costs, agency conflicts, adverse selection and taxes has been attribute as major explanations of the corporate used of debt financing which has been used as an argument in both theory. To date there is no consensus on the existing of optimal capital structure. However over the past four decades, the ability of the economists to explain the determinants of optimal capital structure has progressed significantly. In this paper, based on the review of past literature it is suggested that the determinants of capital structure is vary among firms depending on its characteristics.

A Critical Review of Capital Structure Theories

The purpose of this paper is to scrutinize and appreciate the theories of capital structure starting from theory of Miller and Modigliani (1958) of capital structure, which is also known as irrelevance theory of capital structure and also including theory like pecking order theory, trade off theory, market timing theory and agency cost theory. In addition, authors have tried to explain the theories and their contradiction with each other in detail. This paper will be an addition to understand the theories of capital structure.

Reassess of Capital Structure Theories

This study presents a review of major capital structure fiction. Capital structure decision is important for companies because it helps to increase firm value by ensuring that the company has enough resources to carry out planned investments using as much as possible the cheapest cost of capital. It therefore involves choices between the different sources of capital such as debt, equity and hybrid capital. The different sources of finance available to companies are also influenced by the quality and maturity of the financial system and the overall risk of operating in that environment. The paper identified a host of capital structure theories that are key contemplation in the financing structure of firms around the world. This review will help companies in emerging and underdeveloped economies identify the peculiarities in the choosing the appropriate blend of capital.

A REVIEW OF THE CAPITAL STRUCTURE THEORIES

In this paper the authors survey capital structure theories, from the start-up point, which is considered Modigliani and Miller's capital structure irrelevance theorem, to recent theories, such as the pecking order and the market timing theory. For each type of model, a brief overview of the papers surveyed and their relation to each other is provided.

The theory of capital structure , Sermaye Yapısının Belirlenmesi

hanges in Capital Structure of Czech SMEs: A Dynamic Panel Data Approach , 2013

In this paper, we explore two of the most relevant theories that explain the financial policy in small and medium enterprises (SMEs): pecking order theory and trade-off theory. The theoretical section provides an overview of contemporary theories of capital structure. According to the pecking order theory changes in the level of debt are not motivated by the need to reach a given debt target, but instead are motivated by the need for external financing. In the trade-off theory, companies identify their optimal capital structure and weigh up the advantages and disadvantages of an additional monetary unit of debt. Panel data methodology is used to test the empirical hypotheses over the sample of 260 Czech SMEs during the years 2004-2011 using annual data. To test pecking order theory and trade-off theory we use total debt ratio as a dependent variable and independent/explanatory variables depending on previous literature that corresponds to specific company characteristics. The results suggest that both theoretical approaches contribute to explaining capital structure in Czech SMEs and identifying major forces that lie behind their indebtedness. ifrs smes , list of smes