The Determinants of the Capital Structure of a Company
There are a number of theories which have tried explaining variations that are there among various debt ratios across different organizations. These theories state that different companies select different capital structures based on various advantages and costs that are associated with equity and debt financing.
Unfortunately empirical work is far behind theoretical research because the various traits of a particular firm are based on certain abstract theories that are not directly visible.
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It is for this reason that there have been many researches that have been conducted in this field. This research states that companies that sell unique products have very low debt ratios.
By uniqueness here we mean the sale related expenses,firm’s expenses on various researches and developments and also the frequency in which employees of an organization leave their jobs.It has also been observed that companies that are smaller in size have lesser debts as compared to bigger companies.
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Determinants of Capital Structure
Attributes of the company determine capital structure. Non-debt tax shields, uniqueness, size and earning volatility are the most important attributes of a particular company.
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Some of these determinants are listed below:
Collateral value of assets
According to most of the Capital Structure theories types of assets that are owned by a particular company determine capital structure for that company. There are often times when companies sell their secured debts in order to increase value of their equities in the market.
There are also certain costs involved with the selling of securities of a particular company and it is the managers of this company who have proper information about these costs. So if a company issues debts that are secured by the property the value of which is already known, will definitely help in avoiding these costs.
Growth of a company
Companies that are equity financed tend to invest sub optimally in order to take out money from the bond holders of this company. Cost of this relationship tends to be on the higher side especially for those companies that are a part of the growing industry.
If a company has very long term debts then its future growth is also considerably affected. But if a company wants to deal with this problem effectively then it is always better to take short term goals rather than long term ones. If firms issue debts that are convertible then it will surely help in the growth of the company.
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