OPTIMAL CAPITAL STRUCTURES

Still Searching For Optimal Capital Structures by Stewart C. Myers

Still Searching For Optimal Capital Structures by Stewart C. Myers

Introduction

In his article titled, still searching for optimal capital structures, Stewart C. Myers explores the theories of optimal capital structure, reflecting on the behaviors of the financial market events. Specifically, the author reviews the organizational theories, trade-off and pecking order in the context of capital structure of companies. In Myers' view, the events in capital and financial markets change the financial positions of companies in different manners.

Summary of Methodology

The author uses several theories relating to capital structure through diagrammatic illustrations. Specifically, the author examines the static trade-off theory of capital structure, the pecking order theory, and organizational theory of capital structure. Myers attempts to prove the implications of these theories while tracing their application in the corporate financing scenarios. In his view, the actual behavior of corporate financing entities is impacted by a blend of factors ranging from cost considerations to investor risk attitudes.

Underlying Issues

There can be two major ways through which companies can finance their activities: equity financing and debt financing. Both of these major financial resources have different implications with them and the decision to finance the company depends on the situation and different scenarios that a company is facing. Following are the implication with each type of financing.

Equity financing

There are two fundamental ways of raising equity finance; the issuance of the company stocks to the venture capitalists or investors, and by publically offering company stocks to the investors. When capital is raised through equity financing it involves the selling of partial interest in the firm to the shareholders. In return of the investment that the shareholders made they receive the equivalent number of shares and ownership in the company. The equity financing is done when ...