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Concept
Trade-off theory of capital structure
Résumé
The trade-off theory of capital structure is the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. The classical version of the hypothesis goes back to Kraus and Litzenberger who considered a balance between the dead-weight costs of bankruptcy and the tax saving benefits of debt. Often agency costs are also included in the balance. This theory is often set up as a competitor theory to the pecking order theory of capital structure. A review of the trade-off theory and its supporting evidence is provided by Ai, Frank, and Sanati.
An important purpose of the theory is to explain the fact that corporations usually are financed partly with debt and partly with equity. It states that there is an advantage to financing with debt, the tax benefits of debt and there is a cost of financing with debt, the costs of financial distress including bankruptcy costs of debt and non-bankruptcy costs (e.g. staff leaving, suppliers demanding disadvantageous payment terms, bondholder/stockholder infighting, etc.). The marginal benefit of further increases in debt declines as debt increases, while the marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade-off when choosing how much debt and equity to use for financing.
The empirical relevance of the trade-off theory has often been questioned. Miller for example compared this balancing as akin to the balance between horse and rabbit content in a stew of one horse and one rabbit. Taxes are large and they are sure, while bankruptcy is rare and, according to Miller, it has low dead-weight costs. Accordingly, he suggested that if the trade-off theory were true, then firms ought to have much higher debt levels than we observe in reality. Myers was a particularly fierce critic in his Presidential address to the American Finance Association meetings in which he proposed what he called "the pecking order theory".
Fama and French criticized both the trade-off theory and the pecking order theory in different ways.
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Publications associées (3)
Concepts associés (5)
Trade-off theory of capital structure
The trade-off theory of capital structure is the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. The classical version of the hypothesis goes back to Kraus and Litzenberger who considered a balance between the dead-weight costs of bankruptcy and the tax saving benefits of debt. Often agency costs are also included in the balance. This theory is often set up as a competitor theory to the pecking order theory of capital structure.
Théorie de l'ordre hiérarchique financier
La théorie de l'ordre hiérarchique financier (en anglais, pecking order theory) postule que coût de financement augmente en fonction de l'asymétrie d'information. Cette théorie est popularisée par Myers and Majluf en 1984. C'est une des théories les plus importantes de la finance d'entreprise. La théorie de l'ordre hiérarchique financier établit que, des trois formes de financement possibles pour une entreprise (trésorerie interne, la dette, les actions), une entreprise préférera se financer à partir de sa trésorerie interne, puis de la dette, et enfin, en dernier cas, en vendant des actions.
Finance d'entreprise
La finance d'entreprise ou gestion financière, est le champ de la finance relatif aux décisions financières des entreprises. Son objet essentiel est l’analyse et la « maximisation de la valeur de la firme pour ses actionnaires envisagée sur une longue période » . En termes plus précis, l'enjeu consiste à optimiser la valeur de la séquence des profits monétaires futurs (relativement à un horizon de référence) sous la contrainte de la limitation des risques courus.
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