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Financing Decisions and the Theory of the Firm

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  • Inselbag, Isik

Abstract

A firm periodically makes three major classes of decisions that determine its structure as reflected on its balance sheet. The first relates to the total amount of investment as well as the distribution of this total amount among different types of assets. This decision determines the size of the firm and the structure of the “assets” side of its balance sheet. The second is concerned with the relative proportion of equity versus debt capital to be used in financing the firm. This decision determines the structure of the “sources” side of the balance sheet by establishing relative sizes of liabilities and stockholders' worth. The third is the choice of the proportion of the equity which should be raised through the retention of earnings and the proportion to be raised through the sale of new stock. This decision determines the dividends that will be distributed and the composition of the stockholders' worth portion of the balance sheet.

Suggested Citation

  • Inselbag, Isik, 1973. "Financing Decisions and the Theory of the Firm," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(5), pages 763-776, December.
    • Handle: RePEc:cup:jfinqa:v:8:y:1973:i:05:p:763-776_01
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    Cited by:

    1. Frijns, J.M.G. & Hempenius, A.L., 1977. "Dynamic optimal factor demand under financial constraints," Research Memorandum FEW 65, Tilburg University, School of Economics and Management.
    2. Frijns, J.M.G. & Hempenius, A.L., 1977. "Dynamic optimal factor demand under financial constraints," Other publications TiSEM 9e5b58b9-6aff-4eee-b79f-1, Tilburg University, School of Economics and Management.

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