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Theoretical review of capital structure theories
[Přehled teorií kapitálové struktury]

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  • Hoang Long Pham

Abstract

This article describes the best-known theories related to the capital structure topic. Since the publication of the Modigliani and Miller's (1958), the theory of capital structure of firms has been a study of interest to finance economists. In the paper, we will describe three main theories of capital structure, which diverge from the assumption of perfect capital markets under which the MM model is working. The first is the Trade off theory. The trade-off theory is the trading-off the benefits of the firm with cost of debt and equity. It means that companies try to find "optimal" capital structure to have a best combination of debt and equity. The second is the pecking order theory, which states that the company follows a hierarchy of financing (internal financing, debts and, last but not least, the issue of securities) in order to minimize problems with information asymmetries between managers and shareholders. In 2002, Baker and Wurgler came up with a new theory of capital structure: "Market Timing Theory." This theory states that existing capital structure is the cumulative result of the firm's past experience, which it had attempted time to time under equity market.

Suggested Citation

  • Hoang Long Pham, 2020. "Theoretical review of capital structure theories [Přehled teorií kapitálové struktury]," Oceňování, Prague University of Economics and Business, vol. 13(3-4), pages 18-24.
    • Handle: RePEc:prg:jnloce:v:13:y:2020:i:3-4:id:2020_3_02:p:18-24
    DOI: 10.18267/j.ocenovani.251
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital structure; Pecking order theory; Trade-off theory; Market timing theory; Kapitálová struktura; Pecking order teorie; Trade-off teorie; Market timing;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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