The core content and viewpoint of the main theory of capital structure

The development process of capital structure theory can be roughly divided into two stages: the former stage is the old capital structure theory period, and the latter stage is the new capital structure theory period. The former can be divided into traditional capital structure theory and modern capital structure theory, and their importance is different. Modern capital structure theory was formed in the middle and late 1950s, and spanned to the late 1970s. It takes franco modigliani and Miller Theorem (MM Theorem for short) as the core and develops along two main branches, one of which is represented by Farah, Sellven, Beinan and Stapleton. This paper mainly discusses the influence of tax differences on capital structure. This school finally reached its peak with Miller. The other is bakht, Stiglitz, atman and Warner. The capital structure theory focuses on the relationship between financial crisis cost and bankruptcy cost and capital structure. These two schools finally come down to the trade-off theory advocated by Robichek, meyers, Squid, Kaus and Li Zhen Berg. At the end of 1970s, scholars broke through the research framework of MM theory, took interest asymmetry as an important condition for research, and developed a new theory of capital structure.

The basic conclusion of capital structure theory can be simply summarized as follows: under the hypothesis of this theory, the value of a company has nothing to do with its capital structure. The value of a company depends on its actual assets, not the market value of its various creditor's rights and equity.

Revision of MM Capital Structure Theory

The revised view holds that if corporate income tax is considered, the value of the company will increase with the improvement of financial leverage, thus drawing the conclusion that the capital structure of the company is related to the value of the company.

New capital structure theory

Agency cost theory

Agency cost theory is formed by studying the relationship between agency cost and capital structure. Through analysis, the theory points out that the default risk of corporate debt is the increase of financial leverage; With the increase of corporate debt capital, the supervision cost of creditors will rise, and creditors will demand higher interest rates. This agency cost is ultimately borne by shareholders, and the high debt ratio in the company's capital structure will lead to the decrease of shareholder value. According to the agency cost theory, moderate debt capital structure will increase shareholder value.

The above-mentioned agency cost theory of capital structure is limited to the agency cost of debt.

Signal transmission theory

According to the signaling theory, a company can adjust its capital structure to convey information about profitability and risk, and how it views the stock market price.

According to the signal theory of capital structure, when the company's value is undervalued, it will increase debt capital, and vice versa.

pecking order theory

Pecking order theory of capital structure thinks that companies tend to adopt internal financing first; If external financing is needed, the company will first choose bond financing and then choose other external equity financing. The choice of financing order will not convey the information that will have a proportional impact on the company's stock price.

According to pecking order theory, there is no obvious target capital structure, because although both retained earnings and new shares are equity financing, the former is selected first and the latter is selected later. Companies with strong profitability arrange lower debt ratios not because they set a lower target debt ratio, but because they don't need external financing. Companies with poor profitability choose debt financing because they do not have enough retained earnings, and debt financing is the first choice among external financing options.