Mostafa, H. T. and Boregowda, S. (2014) A brief review of capital structure theories. Research Journal of Recent Sciences, 3 (10). pp. 113-118. ISSN 2277-2502
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This paper surveys literatures on five theories of capital structure theories from Modigliani and Miller research paper at 1958 to Halov and heider at 2004. There are two main sources of firms’ financing: internal and external financing, internal financing is related to retained earnings and external financing could be in the form of borrowing or issue of equity. Firms continuously invest because of sustain and growth, for these reasons firms’ financing decisions are very important. Traditional trade-off theory and pecking order theory are most acceptable theories of capital structure. As the traditional trade-off theory asserts, firms have one optimal debt ratio (target leverage). In comparison the pecking order theory implies firms’ preference to internal finance over external finance and debt over equity. From the literature it cannot be concluded whether debt has any tax benefit on balance or not. But it can be said that the share price increases with the debt issuing announcement and falls after announcement of equity issue. As agency models anticipate, leverage is directly related to the value of firm, default probability, free cash flow, extent of regulation, liquidity value, interest coverage, cost of investigation of firm’s prospects and the probability of reorganization upon default. On the other hand, leverage is expected to have inverse relationship with the growth opportunities and the importance of managerial reputation. And also, there are no conclusions about the effects of managerial ownership on leverage.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | Capital Structure and Traditional Trade-Off Theory and Pecking Order Theory and Market Timing Theory and Agency Theory |
| Subjects: | G Commerce > Management Science |
| Divisions: | Department of > Management |
| Depositing User: | Users 19 not found. |
| Date Deposited: | 04 Oct 2019 09:57 |
| Last Modified: | 04 Oct 2019 09:57 |
| URI: | http://eprints.uni-mysore.ac.in/id/eprint/8713 |
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