Optimizing capital structure: a model of optimal capital structure from the perspective of recent developments in decision making

Abstract

Many studies have been conducted to test the validity of capital structure theories, but it still remains one of the most debated issues in modern corporate finance. The question of how companies choose the ideal capital structure still needs an answer today. For this reason, other empirical studies on this issue have been done and will continue to be done in order to bring further facts on the theories of capital structure. The study of Myers (1984) is one of the most cited in the extensive literature on capital structure, which explains corporate financing by considering some of the firm-specific factors in developed countries. Two competing theories have attracted considerable interest over the years, the optimal capital structure theory and the Pecking order theory. This paper presents a summary of all the controversies that have resulted in capital structure theories and at the same time tests the two most prominent theories, the optimal capital structure theory and the choice order theory to see which theory fits best. well the way of selecting the capital structure throughout the period considered. The purpose of this paper is to provide an in-depth review of important topics related to capital structure and corporate financing decisions. Coverage ranges from discussion of basic components and existing theories to their application to increasingly complex, real-world situations. The paper highlights how a sound capital structure can simultaneously reduce a firm's cost of capital while increasing shareholder value. Given the large volume of theoretical and empirical studies involving the capital structure and the financial decisions of its good management, the prospect of surveying the existing literature is a task that requires serious commitment.