Bankruptcy of the Famous Trade-Off Theory

Peter Brusov, Tatiana Filatova and Natali Orekhova
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Tatiana Filatova: Financial University under the Government of Russian Federation
Natali Orekhova: Financial University under the Government of Russian Federation

Chapter Chapter 5 in The Brusov–Filatova–Orekhova Theory of Capital Structure, 2023, pp 89-117 from Springer

Abstract: Abstract Within modern theory of capital structure and capital cost by Brusov–Filatova–Orekhova (Brusov et al. Appl Financ Econ 21:815–824, 2011a; Res J Econ Bus ICT 2:16–21, 2011b; Res J Econ Bus ICT (UK) 2:11–15, 2011c; Res J Econ Bus ICT 2: 16–21, 2011d; Appl Financ Econ 22:1043–1052, 2012a; J Rev. Glob Econ 1:106–111, 2012b; J Rev. Glob Econ 2:94–116, 2013a; J Rev. Glob Econ 2:183–193, 2013b; Cogent Econ Financ 2:1–13, 2014a; J Rev. Glob Econ 3:175–185, 2014b; Brusov and Filatova, Financ Credit 435:2–8, 2011; Filatova et al. Bull FU 48:68–77, 2008) the analyses of wide known trade-off theory have been made. It is shown that suggestion of risky debt financing (and growing credit rate near the bankruptcy) in opposite to waiting result does not lead to growing of weighted average cost of capital, WACC, which still decreases with leverage. This means the absence of minimum in the dependence of WACC on leverage as well as the absence of maximum in the dependence of company capitalization on leverage. Thus, it means that the optimal capital structure is absent in famous trade-off theory. The explanation to this fact has been done.

Keywords: Brusov–Filatova–Orekhova (BFO) theory; Trade-off theory; The weighted average cost of capital; Equity cost; Company capitalization; A qualitatively new anomalous effect (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-27929-4_5

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DOI: 10.1007/978-3-031-27929-4_5

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