Managers’ Capital Structure Decisions - The Pecking Order Puzzle

• After the seminal paper by Modigliani & Miller putting forward the irrelevance theorem over fifty years ago, a number of competing theories have been developed for explaining why the financial structure is still believed to be relevant within business firms. Two theories stand out being both frequently referred to and contradictory to each other. The ‘trade-off’ theory suggests that corporate taxes in combination with bankruptcy costs imply that there exists an optimal combination of debt and equity capital that top management should search for in order to maximize shareholder value. The challenging ‘pecking-order’ theory recognizes no such optimum, but instead that there exists a ranking order in the firms between different types of capital where the issuance of equity capital is the seen only as a last resort. The financial structure of a firm is simply an aggregated outcome of financial decisions made by management at different points in time in accordance with the ranking order. In previous research there are empirical evidence supporting either one or both of these theories. However, there are also those proposing other explanations to firms’ financial structure. This paper presents results from a comprehensive survey of financial structure decisions in larger Swedish business firms. It examines the role and importance of different firm characteristics as well as to what extent top management in the firms is affected by concepts like optimal capital structure, financial hierarchy, windows of opportunity, signalling, asymmetric information, risk and uncertainty.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Företagsekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Business Administration (hsv//eng)

Keyword

corporate finance

capital structure

uncertainty

Publication and Content Type

vet (subject category)

kap (subject category)