Abstract

http://ssrn.com/abstract=909392
 
 

References (16)



 
 

Citations (1)



 


 



Capital Structure Theory: A Current Perspective


Robert S. Harris


University of Virginia - Darden School of Business

Susan Chaplinsky


University of Virginia - Darden School of Business


UVA-F-1165

Abstract:     
Finance scholars' approach to capital-structure issues reflects a progression of thought over time. This note provides an overview of the current state of capital-structure theory. One perspective on capital-structure choice is to view it as posing trade-offs among five elements: (1) the tax benefits of financing, (2) the explicit costs of financial distress, (3) the agency costs of debt (including an array of indirect costs linked to financial distress), (4) the agency costs of equity, and (5) the signaling effect of security issuance. The first two elements reflect the "modern, traditional" balancing theory of capital structure. The third and fourth build on agency theory and imperfect information and emphasize the individual incentives of decision makers. The fifth element recognizes that the very act of issuing a security can convey new information to investors when there is imperfect information. While newer theories provide a rich array of insights into aspects of financial policy beyond how much debt the firm should undertake, the downside is that at present there is no overarching synthesis of these theories. As a result, practical application requires careful identification of how these particular theories are relevant to the business, the markets, and the situation at hand. This note is well suited to an advanced corporate-finance course after students have been exposed to the basic theory.

Number of Pages in PDF File: 15

Keywords: capital structure

working papers series





Download This Paper

Date posted: October 21, 2008  

Suggested Citation

Harris, Robert S. and Chaplinsky, Susan, Capital Structure Theory: A Current Perspective. Darden Case No. UVA-F-1165. Available at SSRN: http://ssrn.com/abstract=909392

Contact Information

Robert S. Harris (Contact Author)
University of Virginia (UVA) - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4823 (Phone)
434-924-4859 (Fax)
HOME PAGE: http://www.darden.virginia.edu/faculty/harris.htm
Susan J. Chaplinsky
University of Virginia (UVA) - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4810 (Phone)
434-243-7676 (Fax)
HOME PAGE: http://www.darden.virginia.edu/faculty/chaplinsky.htm
Feedback to SSRN


Paper statistics
Abstract Views: 21,220
Downloads: 6,676
Download Rank: 390
References:  16
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.375 seconds