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The Determinants of Capital Structure and its Effects on Corporate Performance:an Econometric Analysis Based on 7,440 US Companies

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4 II. A SUMMARY OF THEORETICAL LITERATURE In this section a brief summary of the theoretical literature on the different theories developed on capital structure is provided. However, this is simply a summary of the main arguments presented in the last fifty years and, by no means, it should be considered as a complete survey. A. CAPITAL STRUCTURE AND FIRM VALUE AND PERFORMANCE Modigliani and Miller (1963) argued that due to tax deductibility of interest payments the appropriate capital structure for a firm is composed entirely of debt. Brigham and Gapenski (1996), however, assert that the Miller-Modigliani (MM) model is probably true in theory, but in practice, bankruptcy costs exist and they increase when equity is traded off for debt. Hence, they argue on an optimal capital structure that is reached when the marginal cost of bankruptcy is equal to the marginal benefit from tax- sheltering provided by the increase in the debt ratio. The task of efficient managers is thus to recognize when this optimal capital structure is achieved and to maintain it over time. In doing so, they will be able to minimize the weighted average cost of capital (WACC) and financing costs, and thus they will maximize firm’s performance and value. In theory, modern financial techniques would allow top managers to calculate accurately optimal trade off between equity and debt for each firm, in practice, however, many studies have found that most firms do not have an optimal capital structure (Simerly and Mingfang, 2000). This is due to the fact that managers do not have an

Anteprima della Tesi di Massimiliano Neri

Anteprima della tesi: The Determinants of Capital Structure and its Effects on Corporate Performance:an Econometric Analysis Based on 7,440 US Companies, Pagina 4

Tesi di Laurea

Facoltà: Scienze Economiche e Aziendali

Autore: Massimiliano Neri Contatta »

Composta da 63 pagine.


Questa tesi ha raggiunto 1806 click dal 20/03/2004.


Consultata integralmente 12 volte.

Disponibile in PDF, la consultazione è esclusivamente in formato digitale.