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Abram Shilov
Abram Shilov

Capital Structure And Corporate Financing Decis...


Firms in different industries will use capital structures better suited to their type of business. Capital-intensive industries like auto manufacturing may utilize more debt, while labor-intensive or service-oriented firms like software companies may prioritize equity."}},"@type": "Question","name": "How Do Managers Decide on Capital Structure?","acceptedAnswer": "@type": "Answer","text": "Assuming that a company has access to capital (e.g. investors and lenders), they will want to minimize their cost of capital. This can be done using a weighted average cost of capital (WACC) calculation. To calculate WACC the manager or analyst will multiply the cost of each capital component by its proportional weight.","@type": "Question","name": "How Do Analysts and Investors Use Capital Structure?","acceptedAnswer": "@type": "Answer","text": "A company with too much debt can be seen as a credit risk. Too much equity, however, could mean the company is underutilizing its growth opportunities or paying too much for its cost of capital (as equity tends to be more costly than debt). Unfortunately, there is no magic ratio of debt to equity to use as guidance to achieve real-world optimal capital structure. What defines a healthy blend of debt and equity varies depending on the industry the company operates in, its stage of development, and can vary over time due to external changes in interest rates and regulatory environment.","@type": "Question","name": "What Measures Do Analysts and Investors Use to Evaluate Capital Structure?","acceptedAnswer": "@type": "Answer","text": "In addition to the weighted average cost of capital (WACC), several metrics can be used to estimate the suitability of a company's capital structure. Leverage ratios are one group of metrics that are used, such as the debt-to-equity (D/E) ratio or debt ratio."]}]}] Investing Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All Simulator Login / Portfolio Trade Research My Games Leaderboard Economy Government Policy Monetary Policy Fiscal Policy View All Personal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All News Markets Companies Earnings Economy Crypto Personal Finance Government View All Reviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All Academy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All TradeSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.InvestingInvesting Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All SimulatorSimulator Login / Portfolio Trade Research My Games Leaderboard EconomyEconomy Government Policy Monetary Policy Fiscal Policy View All Personal FinancePersonal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All NewsNews Markets Companies Earnings Economy Crypto Personal Finance Government View All ReviewsReviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All AcademyAcademy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All Financial Terms Newsletter About Us Follow Us Facebook Instagram LinkedIn TikTok Twitter YouTube Table of ContentsExpandTable of ContentsWhat Is Capital Structure?Dynamics of Debt and EquityOptimal Capital StructureCapital Structure FAQsThe Bottom LineCorporate FinanceCorporate Finance BasicsCapital Structure Definition, Types, Importance, and ExamplesByAlicia TuovilaUpdated December 14, 2022Reviewed byMargaret JamesFact checked by




Capital Structure and Corporate Financing Decis...


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Firms in different industries will use capital structures better suited to their type of business. Capital-intensive industries like auto manufacturing may utilize more debt, while labor-intensive or service-oriented firms like software companies may prioritize equity.


A company with too much debt can be seen as a credit risk. Too much equity, however, could mean the company is underutilizing its growth opportunities or paying too much for its cost of capital (as equity tends to be more costly than debt). Unfortunately, there is no magic ratio of debt to equity to use as guidance to achieve real-world optimal capital structure. What defines a healthy blend of debt and equity varies depending on the industry the company operates in, its stage of development, and can vary over time due to external changes in interest rates and regulatory environment.


In addition to the weighted average cost of capital (WACC), several metrics can be used to estimate the suitability of a company's capital structure. Leverage ratios are one group of metrics that are used, such as the debt-to-equity (D/E) ratio or debt ratio.


We examine how the demand for financial flexibility affects firms' capital structure decisions. We find that: developing firms that are in the phase of financial flexibility building have low leverage; growth firms that are in the phase of utilizing financial flexibility to fund growth opportunities have high leverage; finally, mature firms that are in the phase of recharging financial flexibility have moderate leverage. The financial flexibility framework provides explanations for several capital structure "puzzles" raised in the literature, suggesting that financial flexibility can be an important "missing link" in existing capital structure theories.


COVID-19 has severely constricted the global economic activities. This paper examines the joint effect of capital structure and corporate social responsibility (CSR) activities on firm risk during COVID-19. We find that firms having excessive debt beyond the optimal level experienced high firm risk during the pandemic and the effect is more prevalent among firms with poor CSR performance. In contrast, firms with a debt level below the optimum are self-protected regardless of their CSR practices. Our study provides businesses with insights of post-pandemic directions on capital structure and CSR policies to build up sustainability and resilience in a volatile market.


Citation: Wang J, Hu Y, Liao F, Xu S (2023) Governance of non-state-owned shareholders and corporate capital structure decision: A mechanism test from the opportunistic behavior of management. PLoS ONE 18(1): e0281120.


It has become a consensus in the academic world of modern finance that the target capital structure exists in an enterprise [17]. The adjustment speed and deviation degree of the actual capital structure to the target capital structure of a firm are important contents of the capital structure decision-making, and they are good measurements to the quality of the capital structure decision-making. The shorter the adjustment speed and the smaller the deviation degree, the more conducive to enhancing corporate value, the more efficient capital structure decisions [18]. According to Flannery and Rangan [17], since the operating environment of a firm is uncertain, its actual capital structure will deviate from its target capital structure. Also, environmental uncertainty will affect the speed of capital structure adjustment. The adjustment speed and the deviation degree will impact the value of the firm.


This paper follows Faulkender et al. [3] and Byoun [28], uses the speed of capital structure adjustment and the deviation degree between the actual capital structure and the target capital structure to reflect the decision-making on capital structure and constructs models to verify it. Firstly, we follow Faulkender et al. [3] to construct the target capital structure:(1)


In this formula, Lev* is the target capital structure of the enterprise at the end of the year, Size is the natural logarithm of the asset size at the end of the previous year; Roa is the return on total assets at the end of the previous year; Fixass is the level of tangible assets at the end of the previous year, which is represented as the sum of the inventory and fixed assets at the end of the previous year divided by total assets; Revgro is the growth rate of operating income at the end of last year; Depre means non-debt tax shield, which is represented by the ratio of fixed asset depreciation and total assets at the end of last year; Lev_med is expressed by the median of the capital structure of the enterprise in the same industry in the previous year; Year is an annual dummy variable, u represents the special non-observed effect of the enterprise. The target capital structure is the fitting value of the asset-liability ratio calculated based on the regression of the model (1), which is recorded as Lev*.


In Formula (2), Lev represents the actual capital structure of the enterprise, which is reflected by the asset-liability ratio at the end of the current year; LagLev represents the capital structure of the previous year, reflected by the asset-liability ratio at the end of the previous year; Lev* is the target capital structure, δ is the speed of capital structure adjustment of the firm, which is measured as the ratio of the actual speed adjustment to the target speed adjustment. 041b061a72


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