Capital structure choices

Ted Lindblom, Gert Sandahl and Stefan Sjogren

International Journal of Banking, Accounting and Finance, 2011, vol. 3, issue 1, 4-30

Abstract: Corporate finance theory provides a number of competing hypotheses for explaining the capital structure choice of firms. The major ones are the 'trade-off' theory, which hypothesises an optimal combination of debt and equity capital, and the 'pecking-order' theory, which suggests a ranking order between different types of capital making a firm's capital structure an aggregated result of successive financial decisions. Previous studies find evidence both supporting and contradicting the two theories. We examine the role and importance of different firm characteristics as well as to what extent managers in Swedish firms make capital structure choices in accordance with the theories and are affected by concepts like optimal capital structure, financial hierarchy, windows of opportunity, signalling, asymmetric information and flexibility. Our conclusion is that capital structure choices are built on a balancing notion suggesting a revised trade-off theory or alternatively an extended pecking order theory also incorporating agency costs and signalling.

Keywords: corporate finance; optimal capital structure; trade-offs; pecking order; financial decisions; financial choices; debt; equity; financial hierarchy; window of opportunity; signalling; flexibility; asymmetric information; agency costs. (search for similar items in EconPapers)
Date: 2011
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