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Theory of Capital Structure - a Review

Stein Frydenberg 

Sor Trondelag University College - Trondheim Business School; Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology
January 26, 2011

FRIHET OG MANGFOLD, FESTSSKRIFT TIL ODD, G. Arntzen. L. Fallan & O. Gustafsson, eds., Trondheim: Tapir/TØH, Tapir Academic Press, NO-7005 Trondheim, Norway 
Abstract:      
This paper is a review of the central theoretical literature. The most important arguments for what could determine capital structure is the pecking order theory and the static trade off theory. These two theories are reviewed, but neither of them provides a complete description of the situation and why some firms prefer equity and others debt under different circumstances. The paper is ended by a summary where the option price paradigm is proposed as a comprehensible model that can augment most partial arguments. The capital structure and corporate finance literature is filled with different models, but few, if any give a complete picture.

Number of Pages in PDF File: 41

Keywords: Theory, Capital, Structure, Review, static, trade, pecking, order