literature review on capital structure

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Capital structure theory: past, present, future.

1. Introduction

2. basic theories of capital structure, 2.1. a historical point of view, 2.2. the empirical (traditional) approach, 2.3. the modigliani–miller theory, 2.3.1. the modigliani–miller theory with taxes, 2.3.2. the modigliani–miller theory with taxes, 2.4. modifications of modigliani–miller theory, 2.4.1. hamada model, 2.4.2. the cost of capital under risky debt, 2.4.3. the account of corporate and individual taxes (miller model), 2.4.4. alternative expression for wacc, 2.4.5. the miles–ezzell model versus the modigliani–miller theory, 3. trade–off theory, 3.1. static theory, 3.2. dynamic theory, 3.3. proof of the bankruptcy of the trade-off theory, 4. accounting for transaction costs, 5. accounting for asymmetries of information, 6. signaling theory, 7. pecking order theory, 8. behavioral theories, 8.1. manager investment autonomy, 8.2. the equity market timing theory, 8.3. information cascades, 9. theories of conflict of interests, 9.1. theory of agency costs, 9.2. theory of corporate control and costs monitoring, 9.3. theory of stakeholders, 10. bfo theory, brusov–filatova–orekhova theorem, case of absence of corporate taxes, 11. bfo theory and modigliani–miller theory under inflation, 12. bfo theory for the companies ceased to exist at the time moment n (bfo–2 theory), 13. the modigliani–miller theory with advance payments of tax on profit, 14. the modigliani–miller theory with arbitrary frequency of payment of tax on profit, 15. generalization of the modigliani–miller theory for the case of variable profit, 16. the generalization of the brusov–filatova–orekhova theory for the case of payments of tax on profit with arbitrary frequency, 17. benefits of advance payments of tax on profit: consideration within the brusov–filatova–orekhova (bfo) theory, 18. influence of method and frequency of profit tax payments on company financial indicators, 19. the brusov–filatova–orekhova (bfo) theory with variable income, 20. qualitatively new effects in the theory of capital structure.

• Golden and silver ages of the company
• Anomalous dependence of the cost of equity on the leverage level

20.1. Golden and Silver Ages of the Company

20.2. silver age of the company, 20.3. anomalous dependence of the company’s equity value on leverage, 21. a stochastic extension of the modigliani–miller theory, 22. conclusions.

• generalization of the BFO theory and the MM theory to the case of a company’s variable-in-time income;
• generalization of the BFO theory to the stochastic case and to the case of a company’s variable-in-time income;
• further generalization of the BFO theory and MM theory on the conditions for the practical functioning of the company;
• study the dependence of the effects of the “golden and silver age of the company” on the growth rate of income in the case of a company’s variable income, on the frequency of income tax payment, on the advance payment of income tax, and on a combination of these conditions;
• develop a methodology for determining the financial parameters of a company in the event of a drop in income, in the event of an increase in the company’s income, as well as in the case of alternating growth and falling income.

Share and Cite

Brusov, P.; Filatova, T. Capital Structure Theory: Past, Present, Future. Mathematics 2023 , 11 , 616. https://doi.org/10.3390/math11030616

Brusov P, Filatova T. Capital Structure Theory: Past, Present, Future. Mathematics . 2023; 11(3):616. https://doi.org/10.3390/math11030616

Brusov, Peter, and Tatiana Filatova. 2023. "Capital Structure Theory: Past, Present, Future" Mathematics 11, no. 3: 616. https://doi.org/10.3390/math11030616

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Journal of Advances in Management Research

ISSN : 0972-7981

Article publication date: 28 August 2020

Issue publication date: 27 April 2021

The present study aims to analyse the literature on capital structure theories for the last 21 years to identify the existing gaps and themes for prospective researchers in this domain.

Design/methodology/approach

A sample of 183 articles published from 1999 to 2019 in the Scopus database using “capital structure theory” and “leverage” as keywords was analysed on various basis. A citation analysis was also performed to recognize impactful authors and papers.

The findings revealed that though the capital structure research studies were highly focussed on developed economies, with time, research studies in developing markets are increasing. Further, the capital structure research studies were largely conducted by considering all the industries together, whereas the focus on a particular industrial sector was meagre. Almost all the studies were empirical, thus providing scope for primary research. Various forms of regression were popular econometric techniques used in this area of late. This review highlighted the dominance of trade-off theory to elucidate the capital structure of firms, irrespective of the status of the economy. The comprehensive review uncovered the existing gaps and identified major themes evolving in the capital structure domain.

Originality/value

Unlike a traditional review paper, this study classifies sample articles based on several parameters and depicts a graphical presentation of the findings to cover research gaps, avenues, evolving themes, key aspects, impactful authors and their papers, etc. in the capital structure domain. It provides ready-made information available for prospective research studies in this field.

• Capital structure
• Citation analysis
• Trade-off theory

Acknowledgements

The authors extend their sincere thanks to the editors for providing them the opportunity to publish in Journal of Advances in Management Research (a journal of international repute). They would also like to extend their regards to the anonymous reviewers for the rigorous review, helpful comments and constructive suggestions. The feedback has surely contributed to the enhancement of the original piece of work. However, all of the remaining errors and omissions are of authors.

Bajaj, Y. , Kashiramka, S. and Singh, S. (2021), "Application of capital structure theories: a systematic review", Journal of Advances in Management Research , Vol. 18 No. 2, pp. 173-199. https://doi.org/10.1108/JAMR-01-2020-0017

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• DOI: 10.4236/ME.2018.910103
• Corpus ID: 158841268

Literature Review of Capital Structure Theory and Influencing Factors

• Lanwendi Zhao
• Published 9 October 2018
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A Critical Literature Review of Capital Structure Theories

American Based Research Journal, Vol. 8 Issue 11, November 2019

5 Pages Posted: 26 May 2020

Mr. Douglas Wafula Simiyu

Affiliation not provided to ssrn, dr. willis (phd) otuya.

Masinde Muliro University of Science & Technology

Date Written: November 1, 2019

Capital structure is a vital component of any business entity. The success and or failure of many business enterprises arise from their capital structures. Many financial institutions adopt different approaches regarding their capital structure arrangement. Some depend entirely on debt financing, others depend more on equity financing and others still mix the two approaches. The question has been which capital structure is the best for financial institutions? For those firms which prefer mixing the two approaches, what would be the best portion for the two approaches? This paper critically reviews the capital structure theories, which include Franco Modigliani and Merton Miller theorem, Trade-off theory of capital structure and taxes, Pecking order theory, The market timing theory and Agency cost theory. This paper suggests that any financial institution should carefully analyze its operations before making its capital structure decision.

Keywords: Capital structure theories, Debt financing, Equity financing

Suggested Citation: Suggested Citation

Dr. Willis (Phd) Otuya (Contact Author)

Masinde muliro university of science & technology ( email ).

Box 190-50100 Kakamega, Nyanza 50100 Kenya

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Research on capital structure determinants: a review and future directions

Research output : Contribution to journal › Review Article › Research › peer-review

Purpose: The purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. This paper highlights the major gaps in the literature on determinants of capital structure and also aims to raise specific questions for future research. Design/methodology/approach: The prominence of research is assessed by studying the year of publication and region, level of economic development, firm size, data collection methods, data analysis techniques and theoretical models of capital structure from the selected papers. The review is based on 167 papers published from 1972 to 2013 in various peer-reviewed journals. The relationship of determinants of capital structure is analyzed with the help of meta-analysis. Findings: Major findings show an increase of interest in research on determinants of capital structure of the firms located in emerging markets. However, it is observed that these regions are still under-examined which provides more scope for research both empirical and survey-based studies. Majority of research studies are conducted on large-sized firms by using secondary data and regression-based models for the analysis, whereas studies on small-sized firms are very meager. As majority of the research papers are written only at the organizational level, the impact of leverage on various industries is yet to be examined. The review highlights the major determinants of capital structure and their relationship with leverage. It also reveals the dominance of pecking order theory in explaining capital structure of firms theoretically as well as statistically. Originality/value: The paper covers a considerable period of time (1972-2013). Among very few review papers on capital structure research, to the best of authors’ knowledge; this is the first review to identify what is missing in the literature on the determinants of capital structure while offering recommendations for future studies. It also synthesize the findings of empirical studies on determinants of capital structure statistically.

• Capital structure
• Literature review
• Meta-analysis
• Pecking order

This output contributes to the following UN Sustainable Development Goals (SDGs)

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• 10.1108/IJMF-09-2014-0135

Other files and links

• Link to publication in Scopus

T1 - Research on capital structure determinants

T2 - a review and future directions

AU - Kumar, Satish

AU - Colombage, Sisira

AU - Rao-Melancini, Purnima

N2 - Purpose: The purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. This paper highlights the major gaps in the literature on determinants of capital structure and also aims to raise specific questions for future research. Design/methodology/approach: The prominence of research is assessed by studying the year of publication and region, level of economic development, firm size, data collection methods, data analysis techniques and theoretical models of capital structure from the selected papers. The review is based on 167 papers published from 1972 to 2013 in various peer-reviewed journals. The relationship of determinants of capital structure is analyzed with the help of meta-analysis. Findings: Major findings show an increase of interest in research on determinants of capital structure of the firms located in emerging markets. However, it is observed that these regions are still under-examined which provides more scope for research both empirical and survey-based studies. Majority of research studies are conducted on large-sized firms by using secondary data and regression-based models for the analysis, whereas studies on small-sized firms are very meager. As majority of the research papers are written only at the organizational level, the impact of leverage on various industries is yet to be examined. The review highlights the major determinants of capital structure and their relationship with leverage. It also reveals the dominance of pecking order theory in explaining capital structure of firms theoretically as well as statistically. Originality/value: The paper covers a considerable period of time (1972-2013). Among very few review papers on capital structure research, to the best of authors’ knowledge; this is the first review to identify what is missing in the literature on the determinants of capital structure while offering recommendations for future studies. It also synthesize the findings of empirical studies on determinants of capital structure statistically.

AB - Purpose: The purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. This paper highlights the major gaps in the literature on determinants of capital structure and also aims to raise specific questions for future research. Design/methodology/approach: The prominence of research is assessed by studying the year of publication and region, level of economic development, firm size, data collection methods, data analysis techniques and theoretical models of capital structure from the selected papers. The review is based on 167 papers published from 1972 to 2013 in various peer-reviewed journals. The relationship of determinants of capital structure is analyzed with the help of meta-analysis. Findings: Major findings show an increase of interest in research on determinants of capital structure of the firms located in emerging markets. However, it is observed that these regions are still under-examined which provides more scope for research both empirical and survey-based studies. Majority of research studies are conducted on large-sized firms by using secondary data and regression-based models for the analysis, whereas studies on small-sized firms are very meager. As majority of the research papers are written only at the organizational level, the impact of leverage on various industries is yet to be examined. The review highlights the major determinants of capital structure and their relationship with leverage. It also reveals the dominance of pecking order theory in explaining capital structure of firms theoretically as well as statistically. Originality/value: The paper covers a considerable period of time (1972-2013). Among very few review papers on capital structure research, to the best of authors’ knowledge; this is the first review to identify what is missing in the literature on the determinants of capital structure while offering recommendations for future studies. It also synthesize the findings of empirical studies on determinants of capital structure statistically.

KW - Capital structure

KW - Leverage

KW - Literature review

KW - Meta-analysis

KW - Pecking order

UR - http://www.scopus.com/inward/record.url?scp=85015743903&partnerID=8YFLogxK

U2 - 10.1108/IJMF-09-2014-0135

DO - 10.1108/IJMF-09-2014-0135

M3 - Review Article

AN - SCOPUS:85015743903

SN - 1743-9132

JO - International Journal of Managerial Finance

JF - International Journal of Managerial Finance

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

• Published: 13 November 2019
• Volume 70 , pages 535–565, ( 2020 )

Cite this article

• Satish Kumar   ORCID: orcid.org/0000-0001-5200-1476 1 ,
• Riya Sureka 1 &
• Sisira Colombage 2  

5495 Accesses

93 Citations

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Capital structure is the outcome of market conditions, financial decisions taken by the firm, and credit rationing of fund providers. Research on the capital structure of small and medium enterprises (SMEs) has gained momentum in recent years. The present study aims to identify key contributors, key areas, current dynamics, and suggests future research directions in the field of the capital structure of SMEs. This paper adopts a systematic literature review methodology along with bibliometric, network, and content analysis on a sample of 262 studies taken from the Web of Science database to examine the research activities that have taken place on this topic. Most influential papers are identified based on citations and PageRank, along with the most influential authors. The co-citation network is developed to see the intellectual structure of this research area. Applying bibliometric tools, four research clusters have been identified and content analysis performed on the papers identified in the clusters. It is found that the major research focus in this area is around theory testing—mainly, pecking order theory, trade-off theory, and agency theory. Determinants of capital structure, trade credit, corporate governance, and bankruptcy are also the prominent research topics in this field. Also, this study has identified the research gaps and has proposed five actionable research directions for the future.

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Kumar, S., Sureka, R. & Colombage, S. Capital structure of SMEs: a systematic literature review and bibliometric analysis. Manag Rev Q 70 , 535–565 (2020). https://doi.org/10.1007/s11301-019-00175-4

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A Critical Literature Review of Capital Structure Theories

2019, American Based Research Journal

Capital structure is a vital component of any business entity. The success and or failure of many business enterprises arise from their capital structures. Many financial institutions adopt different approaches regarding their capital structure arrangement. Some depend entirely on debt financing, others depend more on equity financing and others still mix the two approaches. The question has been which capital structure is the best for financial institutions? For those firms which prefer mixing the two approaches, what would be the best portion for the two approaches? This paper critically reviews the capital structure theories, which include Franco Modigliani and Merton Miller theorem, Trade-off theory of capital structure and taxes, Pecking order theory, The market timing theory and Agency cost theory. This paper suggests that any financial institution should carefully analyze its operations before making its capital structure decision

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