Abstract
Despite the remarkable amount of research within the field of corporate finance, we still do not know why managers have different preferences with respect to the capital structure. Motivated by the contrasting empirical findings, this article’s primary objective is to propose and discuss a model that explains firms’ financing choices through the lenses of risk. The model identifies four possible objective functions related to the capital structure choice and to the allocation of capital to new investment opportunities. The main implication of the model is that firms do not have an ‘optimal’ capital structure. The propositions presented and discussed in this work can open new and promising research avenues, with the potential of shedding light on the ‘capital structure puzzle’.
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