A REVIEW OF CAPITAL STRUCTURE THEORIES

Abstract

Making a decision of a firm’s capital structure is one of the important work tasks of a financial manager. Thus, the leaders attempt to seek an optimal point of the debt level, which can bring as many as advantages for a firm to boost the firm value. Capital structure theories are to explain how relates of capital structure and firm value. The paper is going to review four influential theories of the subject, including Modigliani and Miller Theory in 1958, Trade-Off Theory, Pecking Order Theory and Free Cash Flow Theory.