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Pecking Order

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Munich Personal RePEc Archive

The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review
Anton Miglo
University of Bridgeport


Online at MPRA Paper No. 46691, posted 6. May 2013 19:07 UTC

The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review

Anton Miglo Associate professor, University of Bridgeport, School of Business, Bridgeport, CT 06604, phone (203) 576-4366, email: This version: 2013 Initial version: 2010

Abstract. This paper surveys 4 major capital structure theories: trade-off, pecking order, signaling and market timing. For each theory, a basic model and its major implications are presented. These implications are compared to the available evidence. This is followed by an overview of pros and cons for each theory. A discussion of major recent papers and suggestions for future research are provided.

The modern theory of capital structure began with and the famous proposition of Modigliani

Miller (1958) that described the conditions of capital structure irrelevance. Since then, been changing these conditions to explain factors driving capital

many economists have

structure decisions. Harris and Raviv (1991) synthesized major theoretical literature in the field, related these to the known empirical evidence, and suggested promising avenues for

future research. They argued that asymmetric information theories of capital structure are less promising than control-based or product-based theories. The financial crisis of 2008-2009 forces to look critically at the modern level of capital structure theory. The problems of many companies were related to their financing policies. The role of asymmetric information and

agency problems has to be understood better....

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