The ratio of debt of a company and its capital is known as leverage. Economic theory has studied formally the choices of business financing since the 1950s. The choice of a given source of funding will determine the capital structure. The focus of economic theory focuses not so much on what or what methods of financing are more affordable.
The study of the capital structure began with the work of Modigliani and Miller (1958), which comes to a conclusion of irrelevance of the capital structure (ie the proposition according to which changes in the capital structure would not create value for companies) under ideal assumptions about the absence of frictions in financial markets, which is covered in financial market news.
The removal of these simplifying assumptions has given rise to two strands of classical theories of capital structure. Theories of trade-off, concluding that there is, for each company, an optimal capital structure.
A line of more recent research based on the findings of behavioral finance, market timing is relative to the hypothesis , according to which companies would resort to the most convenient form of financing at a given moment. The various theories of capital structure are not generally considered mutually exclusive.
Since each theory is based on the removal of a particular hypothesis of the original result of irrelevance of the capital structure of Modigliani and Miller, and in practice it is likely that different assumptions are violated at the same time.
It is expected that the empirically observed facts result from a combination of different effects highlighted by the various theories. Aim of the research on capital structure of firms is to determine how each theory enjoys feedback from the empirical point of view.
The purpose of the various theories described below is not to suggest ways for businesses to finance their investments in the most economical way – more formally, the theories of capital structure does not have a regulatory function.
The theories of capital structure have, however, a positive function, that is, they try to accurately describe the behavior of firms, and to shed light on the mechanisms that drive the choices.
Benefits and risks of issuing debentures
The decision to issue debentures, taken by the board of a company must be preceded not only a careful and thorough analysis of their funding requirements at the time of redemption, as well as a thorough analysis of market conditions, in order to reconcile the launch costs.
Compliance costs – it must be noted that the remuneration of the inversion of resources raised through the issuance of debentures, shall be greater than its costs.