Financial Capital Structure

Contents :

Introduction on Capital Structure

Summary and Evaluation of Articles

Conclusion

References/Bibliography

Introduction On Capital Structure :-

In the field of finance capital structure means a way an organization or firms finances their assets by the way of some mix and match of Equity, Debt or Hybrid Securities.

The modern thinking on capital structure is based on the Modigliani-Miller theorem given by Franco Modigliani and Merton Miller. The theorem suggests that in a perfect market the total value of the company remains the same depending upon how is that company financed. This theorem proves the importance of capital structuring by the firms throughout the globe. There are other reasons as well like bankruptcy costs, agency costs and asymmetric information. Also this paper has tried to explain the trade off theory and it also talks about the firm-specific and country-specific factors of capital structure.

Articles Relating to Capital Structure :-

There have been lots and lots of study, researches, arguments, and articles written on capital structures as it is one of the wide topics to discuss upon.

For an Example, If a company sells £40bn pounds in equity and £60bn pounds as debt then the company is said to be having a capital structure with 40% equity finance and 60% debt finance. And the company’s Leverage Ratio which is given by dividing total debt to total financing i.e. 60% in this example.

Starting with a very informative article in which the writers have tried to analyze the importance of firm-specific and country-specific factors in the leverage choices of 42 different countries around the world. Past researches by [Demirgüç-Kunt and Maksimovic, 1999], [Booth et al., 2001], [Claessens, ...

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...re around the world: The roles of firm-specific and country-specific determinants’, Journal of Banking and Finance, Vol.32, No. 9, pp. 1954-1969. [WWW] Available from-

[Accessed at 9th December, 2008].

Joyce, W. (2000) ‘Capital Structure and Financial Stress’, Credit and Financial Review, Second Quarter. [WWW] Available from- [Accessed at 9th December, 2008].

Miller, M. (1977) ‘Debt and Taxes’, Journal of Finance, Vol.32, pp. 261-276.

Modigliani, F. and Miller, M. (1963) ‘Corporate Income Taxes and the Cost of Capital: A Correction’, American Economic Review, Vol.53, pp. 433-443.

Rajan, R. and Zingales, L. (1995) ‘What do we know about capital structure? Some evidence from international data’, Journal of Finance, Vol.50, pp. 1421–1460.

Telser, L. (1966) ‘Cutthroat competition and the long purse’, Journal of Law and Economics, Vol.9, pp. 259–277.