Download This PaperA Critical Literature Review of Capital Structure Theories
American Based Research Journal, Vol. 8 Issue 11, November 2019
5 Pages Posted: 26 May 2020
Date Written: November 1, 2019
Abstract
Capital structure is a vital component of any business entity. The success and or failure of many business enterprises arise from their capital structures. Many financial institutions adopt different approaches regarding their capital structure arrangement. Some depend entirely on debt financing, others depend more on equity financing and others still mix the two approaches. The question has been which capital structure is the best for financial institutions? For those firms which prefer mixing the two approaches, what would be the best portion for the two approaches? This paper critically reviews the capital structure theories, which include Franco Modigliani and Merton Miller theorem, Trade-off theory of capital structure and taxes, Pecking order theory, The market timing theory and Agency cost theory. This paper suggests that any financial institution should carefully analyze its operations before making its capital structure decision.
Keywords: Capital structure theories, Debt financing, Equity financing
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