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Capital structure choices

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  • Ted Lindblom
  • Gert Sandahl
  • Stefan Sjogren
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    Abstract

    Corporate finance theory provides a number of competing hypotheses for explaining the capital structure choice of firms. The major ones are the 'trade-off' theory, which hypothesises an optimal combination of debt and equity capital, and the 'pecking-order' theory, which suggests a ranking order between different types of capital making a firm's capital structure an aggregated result of successive financial decisions. Previous studies find evidence both supporting and contradicting the two theories. We examine the role and importance of different firm characteristics as well as to what extent managers in Swedish firms make capital structure choices in accordance with the theories and are affected by concepts like optimal capital structure, financial hierarchy, windows of opportunity, signalling, asymmetric information and flexibility. Our conclusion is that capital structure choices are built on a balancing notion suggesting a revised trade-off theory or alternatively an extended pecking order theory also incorporating agency costs and signalling.

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    Bibliographic Info

    Article provided by Inderscience Enterprises Ltd in its journal Int. J. of Banking, Accounting and Finance.

    Volume (Year): 3 (2011)
    Issue (Month): 1 ()
    Pages: 4-30

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    Handle: RePEc:ids:injbaf:v:3:y:2011:i:1:p:4-30

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    Web page: http://www.inderscience.com/browse/index.php?journalID=277

    Related research

    Keywords: corporate finance; optimal capital structure; trade-offs; pecking order; financial decisions; financial choices; debt; equity; financial hierarchy; window of opportunity; signalling; flexibility; asymmetric information; agency costs.;

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    Cited by:
    1. Albert Agyei & Appiah Richard Owusu, 2014. "The Effect of Ownership Structure and Corporate Governance on Capital Structure of Ghanaian Listed Manufacturing Companies," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 109-118, January.

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