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Theoretical Development of Capital Structure

Capital structure theory is one of the important parts of financial theory in western countries. Capital structure theory has gone through two stages: the old capital structure theory and the new capital structure theory. The old capital structure theory is based on a series of strict assumptions for research, including traditional theory, MM theory and trade-off theory. The main research results include:

(1) under ideal conditions, MM theory concludes that capital structure is independent of firm value;

(2) under the condition of the existence of corporate income tax, MM theory concludes that the value of the firm increases with the increase of liabilities;

(3) under the condition of the existence of insolvency costs, the trade-off theory concludes that maximizing the value of the firm is a trade-off between the benefit of avoiding tax and the bankruptcy costs is concluded.

The new capital structure theory is based on asymmetric information for research, including agency theory, control theory, signaling theory and pecking order theory. The main research result is to analyze the governance effect of capital structure under the condition of asymmetric information and the impact on firm value.