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Managers’ Capital Structure Decisions — the Pecking Order Puzzle

In: Bank Performance, Risk and Firm Financing

Author

Listed:
  • Ted Lindblom
  • Gert Sandahl
  • Stefan Sjögren

Abstract

What is the rationale behind capital structure decisions in business firms? Theories targeting these decisions depart from more or less reasonable assumptions about market efficiency in terms of the objectives, expectations and information access of different stakeholders, like shareholders, creditors and managers. In this respect the theories alone provide only a partial understanding concerning the choice of a certain capital structure. On the one hand, we have the irrelevance theorem of Modigliani and Miller (1958), stating that value creation is independent of the financial mix. Their separation between value creation and financing constitutes the foundation for modern corporate finance, even though the assumption of perfect capital markets and zero transaction costs is an illusion. On the other hand, introducing a market imperfection in the form of corporate tax makes the funding of assets relevant to the market value of the firm.

Suggested Citation

  • Ted Lindblom & Gert Sandahl & Stefan Sjögren, 2011. "Managers’ Capital Structure Decisions — the Pecking Order Puzzle," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Philip Molyneux (ed.), Bank Performance, Risk and Firm Financing, chapter 12, pages 273-288, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-0-230-31387-3_13
    DOI: 10.1057/9780230313873_13
    as

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