An Empirical Review of Capital Structure Decision-Making

Abstract

The capital structure reflects the proportional relationship between a company's debt and equity, indicating the company's ability to repay debt and refinance. The quality of the capital structure determines the company's future profitability and development trend, serving as an indispensable indicator of the company's financial situation. However, with approximately 70 million companies in the global market, their scales and operating conditions vary in stability and growth. Additionally, their financial and asset structures differ significantly and are subject to macroeconomic fluctuations every year. The risk preferences and attitudes of managers and investors in every enterprise are subjective and affect the development plan of the enterprise. Moreover, tax and fiscal policies in different countries and regions also influence the capital strategies of enterprises. Furthermore, after a successful listing, the capital structure of the enterprise undergoes fundamental changes, diversifying the sources of funds and experiencing new changes in operating models, which is beneficial to the future operational planning and financial strength of funds. Nevertheless, not all companies that go public are beneficial to their development, such as Huawei, Heinz Group, Koch Industrial Group, etc., due to changes in capital structure after going public being detrimental to future corporate profits. Hence, the capital structure of enterprises in different countries, regions, or types of scale needs to be tailored to local conditions. Enterprises should analyze specific situations to establish a more reasonable capital structure with the aim of optimizing company operations.