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The Optimal Capital Structure under the Conditions of Employment: An Application of Theory X and Theory Y

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  • Chamil W. Senarathne

    (Wuhan University of Technology Wuhan, Hubei, China.)

Abstract

The traditional theories governing the capital structure decisions completely ignore the human side of the enterprise (e.g. attitude to work). The objective of this paper is to identify the optimal mix of Theory X and Theory Y type employees to be employed by an organization in order to maintain (i.e. unaffected by the type of employees at work) the optimal level of capital structure. The classification of an employee into Theory X and Theory of Y is made based on the organizational contribution conditional on motivation rather than merely considering the attitude to work. Internal motivation of an employee (i.e. inherently likes or dislikes) alone cannot be identified as the criterion of recognizing employees under Theory X and Theory of Y. Level of attainment of needs within the organization, psychological state of mind and cultural dimension (i.e. individualism-collectivism) of the individual attached to the organization are the main behavioural criteria that distinguish between Theory X-type and Theory Y-type employees. This paper shows that the optimal capital structure is unaffected by the employment mix at the optimal level of Theory X and Theory Y type employees employed by an organization. The firms’ managers must therefore consider the behavioral aspects of employees (e.g. attitude to risk) when making organizational decisions such as financial decisions. For example, mismatches in the capital structure can be explained by a careful analysis of behavioral aspects of employees. By making necessary adjustments to the current employment mix, the firm could eliminate the mismatches in the firm’s capital structure. JEL Classification: M00, M12, M14, M21, G32, G33

Suggested Citation

  • Chamil W. Senarathne, 2020. "The Optimal Capital Structure under the Conditions of Employment: An Application of Theory X and Theory Y," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 23(1), pages 51-69, May.
    • Handle: RePEc:zag:zirebs:v:23:y:2020:i:1:p:51-69
    DOI: 10.2478/zireb-2020-0004
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    References listed on IDEAS

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    More about this item

    Keywords

    theory X and theory Y; motivation; comfort zone; hierarchy of needs theory; capital structure; and risk-return tradeoff;
    All these keywords.

    JEL classification:

    • M00 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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