Optimal Capital Structure: Reflections on Economic and Other Values

24 Pages Posted: 7 Mar 2007

See all articles by Marc Schauten

Marc Schauten

Vrije Universiteit Amsterdam

J. Spronk

Erasmus Research Institute of Management (ERIM)

Date Written: December 12, 2006

Abstract

Despite a vast literature on the capital structure of the firm there still is a big gap between theory and practice. Starting with the seminal work by Modigliani & Miller, much attention has been paid to the optimality of capital structure from the shareholders’ point of view. Over the last few decades studies have been produced on the effect of other stakeholders’ interests on capital structure. Well-known examples are the interests of customers who receive product or service guarantees from the company. Another area that has received considerable attention is the relation between managerial incentives and capital structure. Furthermore, the issue of corporate control and, related, the issue of corporate governance, receive a lion’s part of the more recent academic attention for capital structure decisions. From all these studies, one thing is clear: The capital structure decision (or rather, the management of the capital structure over time) has to deal with more issues than the maximization of the firm’s market value alone. In this paper, we give an overview of the different objectives and considerations that have been proposed in the literature. We show that capital structure decisions can be framed as multiple criteria decision problems which can then benefit from multiple criteria decision support tools that are widely available.

Keywords: Capital structure, MCDA, Multi criteria decision analysis

Suggested Citation

Schauten, Marc and Spronk, Jaap, Optimal Capital Structure: Reflections on Economic and Other Values (December 12, 2006). ERIM Report Series Reference No. ERS-2006-074-F&A. Available at SSRN: https://ssrn.com/abstract=968852

Marc Schauten (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Jaap Spronk

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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