Abstract
The selection of financing is a critical issue for firms, especially the long-term financing in which leads to firm's future investment opportunity. Choice of long-term financing mix employed by the firm are called capital structure, composing financing from debt, equity and hybrid securities that a firm uses to generate its assets, operations and future growth. Capital structure decisions therefore are one of the most important issues in financial management in which can contribute to maximize the firm's value. Likewise, capital structure decisions affect the cost of capital and capital budgeting decisions. In the papers of Modigliani and Miller (1958) showed that capital structure or method of financing is irrelevant to the value of firm under the perfect market assumptions while Modigliani and Miller (1963) argued that capital structure is relevant with firm value under taxation condition. Subsequent researchers have relaxed assumptions such as bankruptcy cost, non-debt tax shield, agency cost, asymmetric information, and have introduced capital market frictions into the model. Seemingly, the main factors affecting capital structure decisions are related to these frictions.
Published Version
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