Capital Structure and Firm Performance

Abstract

structure theory is one of the most important areas of finance and forms the basis for modern thinking on the capital structure of firms. Much controversy has resulted from comparisons of the theory of capital structure originally developed by Franco Modigliani and Merton Miller to real-world situations. Two competing theories have emerged over the years, the optimal capital structure theory and the pecking order theory. While hundreds of scholarly articles have been written on the subject of capital structure, this is the first book to test competing theories against measurements of firms' performance and their underlying capital structure. Ghosh begins with an overview of the controversies regarding capital structure theories, then statistically tests both the optimal capital structure and pecking order theories. Using the binomial approach to test the theories, he analyzes the determinants of capital structure, while discussing the role of market power in determining capital structure decisions. Ghosh probes the questions of new stock offerings and stockholders' returns, and analyzes capital structure and executive compensation. He then looks into debt financing and ownership structure, and the relationship between capital structure and firm profitability - a hotbed of controversy in the capital structure realm. Finally, he discusses the latest developments in the field of capital structure. Capital Structure and Firm Performance is a concise overview of a major issue in business economics and finance, provides a fuller understanding of its influence on the financial performance of firms, and will certainly stimulate further debate on this important topic.