Capital Structure Lit Review

Corporate Financial Management
Literature Review on Capital Structure

Date: 7\12\2012
Name: Tudor Gheorghiu
Student Id: 12254888

Introduction 3
Theories on Capital Structure 3 Modigliani and Miller theory on capital structure 3 Other theories relating to the firm`s capital structure 4 Trade-off theory 4 Pecking order theory 5 Agency theory 6 Choosing between theories 7
Empirical evidence 7 Developed countries: 7 Emerging markets: 9 Capital structure of privatised firms 10
Factors affecting the optimal level of capital structure 11 Personal taxes 11 Cross-country determinants of capital structure 11 Are determinants country or firm specific- small and medium enterprises 12 Supply side determinants of capital structure 12
Conclusion 12
References 12

Introduction
One of the most debated issues in financial literature relates to the topic of capital structure. The theory of capital structure is important for firms as they are constantly making investment choices driven by financing decisions. Theories on this topic attempt to explain the sources and the financial strategies the firms might attempt to follow. The purpose of this paper is to provide a review of some of the financial literature relating to the determinants of capital structure. The most cited theoretical frameworks used to explain the firm`s financing decisions will be presented as well as empirical evidence to support those theories. Furthermore, studies conducted on specific market segments, such as emerging or developed markets will be reviewed along with the main factors affecting the optimal level of capital structure.
The outline of the paper is as follow: Section 1 will present the Modigliani and Miller theory as well as three other theoretical frameworks: the trade-off theory, the pecking order theory and the agency theories. Section 2 presents evidence relating to capital structure at an international level, focusing on emerging and developed markets

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