A literature review of the trade−off theory of capital structure

Abstract

Starting with Modigliani and Miller theory of 1958, capital structure has attracted a lot of attention from different scholars. The main question that they raised where: How do firms choose their capital structure or leverage? Does firm have a target capital structure? What are the main firm’s specific factors or determinants that influence the choice of capital structure? Does the economic conditions of the country (GDP growth rate, inflation rate, base lending rate etc.) influence on the determination of the firm’s level of debt? This paper provides a survey of the literature on trade off theory of capital structure. The aim of this paper is to give useful information in understanding corporate finance and in a particular way the trade-off theory of capital structure. This study represents a theoretical approach which has in focus the literature review of same earlier studies which have proved the existence or not of this theory in different contents. We can conclude that economists have not yet reached a consensus on how to determine the optimal capital structure, the one that would bring the maximization of firm’s value.