The Importance Of Capital Structure Management

825 Words 4 Pages
Super-size and large companies have huge amounts of money/resources to deal with in different ways. Financial executives of big companies have to keep all the immediate, intermediate and future financial necessities of companies in mind while taking any of the important policy decisions. Investment, financing, dividend and working capital decisions entails large amounts of money allocation/elicitation and has considerable impact on the financial well-being of a firm. Hence, all the policy related decisions (Capital structure, dividend policy etc.) has to be taken in a manner that does not hurt the company (e.g. financing the short term needs with short term instruments and long term ones with long term securities) financially (Tripathi & Ahamed, …show more content…
So they came out with Modigliani & Miller (1963) which suggests that firms should employ maximum debt to avail the benefits of tax deductible interest payments. Thus, tax savings connected with debt reduce the cost of capital. Thus, if cost of capital is affected due to change in proportion of debt and equity then capital structure management is clearly an important area of research. In general, finance managers attempt to choose the best combination of debt and equity on the basis of costs and benefits connected with each source of finance to create value for shareholders. Since the seminal study of Modigliani & Miller (1958) researchers have explored the impact of firm-related, industry-related and country-specific factors on debt. But unfortunately findings of these studies are mixed (see Kim & Sorensen, 1986; Titman & Wessels, 1988; Rajan & Zingales, 1995; Wald, 1999; Booth et al., 2001; Baure, 2004; Chen, 2004; Huang & Song, 2006; Gill et al., 2009; Karadeniz et al., 2009; Sheikh & Wang, 2011; Degryse et al., 2012; Chang et al., 2014; Sheikh & Qureshi, 2014; Qureshi et al., 2015). Capital structure emphasizes on a combination of debt and equity to finance a …show more content…
The reason why researchers try to find the optimal capital structure is that it decreases the cost of capital and increases firm market value (Viviani, 2008). A review of the literature reveals that many studies have been carried out on the capital structure of industrialized and developed countries (Hovakimian et al., 2004; Myers, 1977; Rajan and Zingales, 1995) and very few on developing countries (Booth et al., 2001; Huang and Song, 2006). However, the results of these studies have not led to any form of consensus regarding the importance of determining capital structure. This may be because firms use short-term and long-term debts due to their ownership structure and the context of developing and developed countries. Thus, the purpose of the present research is to study the determinants of capital structure in a large sample of listed firms, and the following reasons justify the necessity of carrying out such a research in India. There is no consensus among researchers regarding the factors influencing capital structure decisions, and the results obtained for other studies are inapplicable for

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