The Capital Structure Conundrum: Revisited in the Literature

The study begins with surveying the capital structure theories ranging from MM irrelevance to the latest theories. The survey mainly revolves around four recognized theories of capital structure; the trade-off theory, agency costs theory, pecking order theory, and market timing theory. However, the principal objectives of the study are to investigate the empirical evidences of relevant theories and identify the major determinants of capital structure. The survey takes place both in developed as well as developing countries. The results of survey unveil that each theory, in isolation, fails to gain consensus in explaining the capital structure phenomenon. Rather it seems that the theories, in most cases, are complimentary. Even though the two theories; trade-off and pecking order; have surely some supremacy over others, the recent performance of market timing theory puts other theories into challenge. Amid many determinants of capital structure, this study spots six determinants; profitability, assets tangibility, firm’s size, agency costs, firm’s growth, and market timing as significant ones. But, profitability, agency costs, and market timing are evidently sought to be superior determinants of capital structure choices. Thus, it appears that the capital structure conundrum still remains.