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Bankruptcy of the Famous Trade-Off Theory

In: The Brusov–Filatova–Orekhova Theory of Capital Structure

Author

Listed:
  • Peter Brusov

    (Financial University under the Government of Russian Federation)

  • Tatiana Filatova

    (Financial University under the Government of Russian Federation)

  • Natali Orekhova

    (Financial University under the Government of Russian Federation)

Abstract

Within modern theory of capital structure and capital cost by Brusov–Filatova–Orekhova (Brusov et al. Appl Financ Econ 21:815–824, 2011a; Res J Econ Bus ICT 2:16–21, 2011b; Res J Econ Bus ICT (UK) 2:11–15, 2011c; Res J Econ Bus ICT 2: 16–21, 2011d; Appl Financ Econ 22:1043–1052, 2012a; J Rev. Glob Econ 1:106–111, 2012b; J Rev. Glob Econ 2:94–116, 2013a; J Rev. Glob Econ 2:183–193, 2013b; Cogent Econ Financ 2:1–13, 2014a; J Rev. Glob Econ 3:175–185, 2014b; Brusov and Filatova, Financ Credit 435:2–8, 2011; Filatova et al. Bull FU 48:68–77, 2008) the analyses of wide known trade-off theory have been made. It is shown that suggestion of risky debt financing (and growing credit rate near the bankruptcy) in opposite to waiting result does not lead to growing of weighted average cost of capital, WACC, which still decreases with leverage. This means the absence of minimum in the dependence of WACC on leverage as well as the absence of maximum in the dependence of company capitalization on leverage. Thus, it means that the optimal capital structure is absent in famous trade-off theory. The explanation to this fact has been done.

Suggested Citation

  • Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "Bankruptcy of the Famous Trade-Off Theory," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 89-117, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-27929-4_5
    DOI: 10.1007/978-3-031-27929-4_5
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