CAPITAL STRUCTURES

Journal Article Review: Firms' Histories and Their Capital Structures



Journal Article Review: Firms' Histories and Their Capital Structures

Introduction

In their article titled 'Firms' histories and their capital structures,' Kayhana and Titman examine the impact of the financial variables of a company on the debt and equity structure. The paper puts insights into the role and movements of stock prices, investment expenditures, and cash flows in changing the capital structure of a company. There is substantial evidence that changes in finance structure of the firm are due to changes in the market price movement of stocks. Also, the nature of firm histories also impact on the firm's capital and debt structure.

Summary of Methodology

Ayla Kayhana and Sheridan Titman have used adjustment models in gauging the changes in debt ratio due to variation of the specified variables. Specifically, the authors of this research use Timing measures, financial deficit variable, Stock returns, Leverage deficit and change in target, and profitability in their historic trends.

There are various methods for analyzing the impact of financial variables on capital structure. In general, vertical and horizontal composition represents a tool for analyzing the evolution of each item and participation in assets, liabilities, equity and income statement. This method is used to study trends through successive years, both in absolute numbers and percentage of variation. It also provides valuable information through comparisons with companies in the industry, general market and to know the situation of the company under study. The authors have used both vertical and horizontal comparison of the variables they have chosen in their study.

Understanding of the Presented Issues in the Article

Funding for the firms can be achieved in two ways; by increasing equity or by increasing debt. Shareholders, subject to economic risk, require a compensation rate higher than the lenders that are submitted at ...