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.