A decision maker running a firm evaluates the various
costs and benefits of alternative leverage plans. Kraus and Litzenberger (1973)
provide a classic statement of the theory that optimal leverage reflects a tradeoff
between the tax benefits of debt and the deadweight costs of bankruptcy.
Showing posts with label Literature review in finance. Show all posts
Showing posts with label Literature review in finance. Show all posts
Saturday, 5 May 2012
Literature Review on Optimal Capital Structure
Strebulaev A.
Ilya (2007) discussed in article that optimal capital structure research based
on regularities in the cross section of leverage to discriminate between
various theories of financing policy. Researcher use book and market leverage
and develop relationship with profitability, book to market and firm size.
Changes in market leverage are largely explained by changes in equity value.
Past book to market rations help to predict current capital structure. Firms
use debt financing conservatively, and leverage of stable and profitable firms
appears low. Even if firms have target leverage ratio they slowly moved toward
it.
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