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The Capital Structure Theory and its Practical Implications for Firm Financial Management in Central and Eastern Europe

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  • Rizov, Marian

Abstract

The paper reviews and interprets capital structure theory in a stylized way and explains the conceptual issues, consequences, and implications for financial management. Firms face an uncertain world that does not co-operate with many of the assumptions of the theory. Specific attention is paid to the important issues concerning the capital structure of firms in transition economies. By reconciling empirical evidence with theory practical strategies for managing capital structure in transition are suggested. Thus the higher the risk and volatility in the economy, the lower the proportion of debt in the capital structure should be. Reserving some unused good debt capacity is useful to provide flexibility and lead to increase in firm value.

Suggested Citation

  • Rizov, Marian, 2001. "The Capital Structure Theory and its Practical Implications for Firm Financial Management in Central and Eastern Europe," MPRA Paper 70584, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70584
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    References listed on IDEAS

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    1. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
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    3. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    8. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    9. Warner, Jerold B., 1977. "Bankruptcy, absolute priority, and the pricing of risky debt claims," Journal of Financial Economics, Elsevier, vol. 4(3), pages 239-276, May.
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    Cited by:

    1. Rizov, Marian, 2008. "Corporate capital structure and how soft budget constraints may affect it," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 22(4), pages 648-684.
    2. Rizov, Marian, 2005. "Transition and enterprise restructuring: the role of budget constraints and bankruptcy costs," Economics Letters, Elsevier, vol. 86(1), pages 129-134, January.

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    More about this item

    Keywords

    capital structure; economies in transition; financial management;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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