Agency Costs and Capital Structure Review

Ang S. James et al. (2000) used two alternative measures of agency costs. First they take direct agency costs, calculated as the difference in dollar expenses between a firm with a certain ownership and management structure and the no agency cost base case firm. This measure captures excessive expenses including perk consumption. They standardized expenses by annual sales.

Literature Review on Determinants of Capital Structure

Now researcher presents a brief discussion on the factors that may have an effect on the firm's debt-equity choice. Various researchers have taken different variables to test capital structure. According to Titman and Wessels (1988), these factors are tangibility of assets, size, growth opportunities, profitability, non-debt tax shields, earnings volatility, uniqueness, and industry classification. But Harris and Raviv (1991), includes advertising expenditure and Research & development (R&D) expenditure in these factors list.

Taxes and Capital Structure Review of Literature

Hennessy A. Christopher and Toni M. Whited (2005) argued that traditional formulations of the financing decision place the firm at date zero with no cash on hand. Such firms are at the debt versus external equity financing margin, since each dollar of debt replaces a dollar of external equity. The problem with the traditional approach is that corporations do not spend their lives at date zero. Rather, they evolve in a stochastic way, finding themselves at different financing margins over time.