Capital Structure: A Systematic Review of Theories and Concepts
Capital structure is one of the main issues and key financial decisions in corporate finance. Extant literatures on capital structure show that the debt-equity mix of a firm affects its cost of capital and hence, the firm value implying that a firm would need to adopt the capital structure that maximises its value while resulting in cost minimisation. Based on this, the present study extensively reviews the various theories and conceptual framework that have been used in literature to explain capital structure of firms. The study also discusses the issue of target capital structure, adjustment costs and speed of adjustment; a recent development in the field of capital structure studies. The paper concludes that the various theories are not mutually exclusive, thus, for researchers to solve the capital structure puzzle, there is a need to consider the several factors involved in explaining a firm’s capital structure.
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