Managers’ Capital Structure Decisions — the Pecking Order Puzzle

Ted Lindblom, Gert Sandahl and Stefan Sjögren

Chapter 12 in Bank Performance, Risk and Firm Financing, 2011, pp 273-288 from Palgrave Macmillan

Abstract: Abstract What is the rationale behind capital structure decisions in business firms? Theories targeting these decisions depart from more or less reasonable assumptions about market efficiency in terms of the objectives, expectations and information access of different stakeholders, like shareholders, creditors and managers. In this respect the theories alone provide only a partial understanding concerning the choice of a certain capital structure. On the one hand, we have the irrelevance theorem of Modigliani and Miller (1958), stating that value creation is independent of the financial mix. Their separation between value creation and financing constitutes the foundation for modern corporate finance, even though the assumption of perfect capital markets and zero transaction costs is an illusion. On the other hand, introducing a market imperfection in the form of corporate tax makes the funding of assets relevant to the market value of the firm.

Keywords: Capital Structure; Credit Rating; International Financial Reporting Standard; Financial Distress; Uncertainty Avoidance (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-0-230-31387-3_13

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DOI: 10.1057/9780230313873_13

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