capital structure

Introduction

Capital structure refers to the mix of debt and equity that a firm uses to finance its operations and growth. This topic has been extensively studied across various contexts, including small and medium enterprises (SMEs), large corporations, banking, and real estate. Theories and empirical studies have explored the determinants and implications of different capital structures, providing insights into optimal financial strategies.

Key Insights

Theoretical Foundations and Determinants:
- Pecking Order Theory and Trade-Off Theory: These theories are central to understanding capital structure decisions, with firms often preferring internal financing, then debt, and issuing equity as a last resort .
- Agency Costs and Asymmetric Information: Agency costs, resulting from conflicts between managers and shareholders, and information asymmetries significantly influence capital structure choices .
- Institutional and Country-Specific Factors: Capital structure decisions are influenced by country-specific institutional features, indicating that while some theories are universally applicable, local factors play a crucial role.
Empirical Evidence and Applications:
- SMEs and High-Growth Firms: For SMEs and high-growth firms, factors like market conditions, managerial preferences, and the pecking order theory are more influential than traditional financial theories .
- Banking Sector: Banks have unique capital structures due to regulatory requirements and the need to maintain public confidence. The capital-deposit ratio and risk asset ratios are critical measures, though they have limitations .
- Real Estate Investment: In real estate, capital structure decisions are influenced by factors such as depreciation deductions, financial distress costs, and interest rates.

Conclusion

The study of capital structure reveals a complex interplay of theories and empirical findings. Key determinants include pecking order preferences, agency costs, and asymmetric information. While some theories are broadly applicable, institutional and sector-specific factors significantly influence capital structure decisions. Understanding these nuances is crucial for optimizing financial strategies across different contexts.

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Summary

Introduction

Key Insights

Conclusion

Sources and full results

Capital structure of SMEs: a systematic literature review and bibliometric analysis

Capital structure of SMEs is influenced by market conditions, financial decisions, and credit rationing, with theory testing being a major focus.

The Theory of Capital Structure

Capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations provide insights into corporate behavior and investment decisions.

THE CAPITAL STRUCTURE IN AMERICAN BANKING

This paper proposes a six-category capital structure formula, which accurately measures individual bank capital needs based on the likelihood of asset value shrinkage.

The Determinants of Capital Structure Choice

This paper examines a broader set of capital-structure theories and analyzes short-term, long-term, and convertible debt using a factor-analytic technique to mitigate measurement problems.

Capital Structures in Developing Countries

Capital structure decisions in developing countries are influenced by the same variables as in developed countries, but there are persistent differences due to specific country factors.

Capital structure theory: Reconsidered

Capital structure theory can be reconsidered by making more appropriate assumptions, challenging the scientific nature of mainstream academic finance.

Agency Costs, Risk Management, and Capital Structure

Optimal capital structure reflects tax advantages and agency costs, with hedging benefits often greater when agency costs are low.

Capital structure and small public firms

Small, high-growth corporations follow a "pecking order" in financing needs, with market conditions and personal preferences playing a greater role in capital structure decisions than bankruptcy costs, agency costs, and information asymmetries.

Capital Structure Decisions in Real Estate Investment

Real estate investors' capital structure decisions are influenced by depreciation deductions, financial distress costs, capital constraints, tax rates, and interest rates.

Capital structure in banking

Banking firms' unique capital structure choices, including government financing and preferred shares, can be viewed through the lenses of capital structure theories.

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