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Capital Structure Article

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Choose an article on capital structure. Submit a summary of the article along with your reaction to the article. The summary should be a minimum of 1 page and your reaction should also be a minimum of 1 page.

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This solution explains an article on capital structure and gives reactions to the article. The sources used are also included in the solution.

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The article is:
Myers, S. C. (1984). The capital structure puzzle. The journal of finance, 39(3), 574-592.
Step 1
The summary:
The article says that we know very little about capital structure. The author says that we do not know how firms choose debt, equity, or hybrid securities they issue. Also, the author says that change in capital structure conveys information to investors. We have inadequate understanding of corporate financing behavior and of how that behavior affects security returns. He contrasts two ways of thinking about capital structure. The first is a static trade off framework in which the firm is seen as setting target debt to value ratio and gradually moving towards it. The next is a pecking order framework in which the firm prefers internal to external financing, and debt to equity, if it issues securities. According to this theory the firm has no well defined target debt to value ratio.
The author introduces a modified pecking order theory in which firms have good reasons to ...

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