Capital structure and firm financing decisions

Gladys A. A. Nabieu, Lordina Amoah and Michael Graham

Chapter 4 in The Elgar Companion to Financial Economics, 2025, pp 66-91 from Edward Elgar Publishing

Abstract: The concept of capital structure has significantly changed, reflecting shifts in business operations and financial theories. The capital structure debate began during the Industrial Revolution when large-scale business funding relied on equity. A turning point was the evolution of financial theories in the twentieth century, particularly the Modigliani-Miller Theorem. It challenged conventional wisdom and sparked a study on the trade-offs between debt and equity by arguing that, given specific assumptions, a firm's value is independent of its capital structure. Subsequently, the trade-off and pecking order theories, which focused on the tax benefits of debt and firms’ inclination for internal funding, challenged the capital structure status quo. Today, globalisation and improved financial assets continue to provide more access to funds, changing the capital structure. This chapter explores the evolution, theories, and factors affecting capital structure and its impact on firm performance, financial leverage, and the global perspective of capital structure, using empirics to support it.

Keywords: Capital structure; Financing decisions; Financial leverage; Firms (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035341399
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