This paper is a review of the central theoretical literature. The most important argu- ments for what could determine capital structure is the pecking order theory and the static trade off theory. These two theories are reviewed, but neither of them provides a complete description of the situation and why some firms prefer equity and others debt under dif- ferent circumstances. The paper is ended by a summary where the option price paradigm is proposed as a comprehensible model that can augment most partial arguments. The capital structure and corporate finance literature is filled with different models, but few, if any give a complete picture.
CITATION STYLE
Frydenberg, S. (2004). Theory of Capital Structure - A Review. Mimeo - Sør-Trøndelag University College, Department of Business Administration, 1–41.
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