What Determines a Firm’s Optimal Capital Structure?
A taxonomy of research issues and methods
I.Introduction
The question of what determines a firm’s optimal capital structure is one of the more heavily researched areas in the discipline of finance. Most modern theory has its origins in the works of Modigliani and Miller, whose original paper said that a firm’s capital structure had no effect on the firm’s value (Modigliani and Miller, 1958) and a later paper that showed that taxes acted to increase a firm’s optimum level of debt (Modigliani and Miller, 1963). Since these original papers many factors have been found to influence a firm’s optimum capital structure, including interest rate swaps (Yang, Davis and Leatham, 2001), country specific variables (Hall, Hutchinson and Michaelas, 2004) and industry (Talberg et al, 2008). Many other factors are also explored in many other papers.
The purpose of this taxonomy is to explore the determinants of a firm’s optimal capital structure. Twenty research articles that seek to explore or answer what makes a firm’s optimal capital structure have been chosen from an array of academic journals. These articles are categorized according to the nature of the research undertaken, and then any patterns or trends in the research methods are identified.
The content of this taxonomy is as follows: Section II provides a brief summary on each of the articles. The articles are divided into three groups depending on whether they are theoretical, empirical and causal or empirical and descriptive. For the empirical articles we identify the research issue, research method and research results. Section II also provides a table classifying all of our papers. Section III provides an analysis of the research methods used and identifies any patterns discovered across all of the twenty articles. Section IV provides conclusion.
II.Summary of Articles
1. Theoretical Papers
The cost of capital, corporation finance and the theory of...