Executive summary
The article is introduced by stating ways that exists by which the company’s capital base can be divided between debt and equity in order to maximise the firm’s value. The article however, clarifies that there is still no definitive answers to these questions; debt and equity. The article then says that over the past decades, financial economics have worked hard to transform the sector into more scientific using formal theories which can be tested by empirical studies of corporate and the stock market. However, some of the theories have encountered fierce critique the empirical methods in corporate finance have lagged behind those in the capital market due to reasons like, less price models compared to those of asset pricing among others.
The article stipulates some of the current corporate finance theories. These theories are said that can be grouped into three broad categories: taxes, contracting costs and the information costs. Information costs can be looked at in three different categories such as market timing, signalling and pecking order. Each theory has its own explanation. After looking at various classes of theories and their sub divisions, the article examines the available empirical evidences to explain the relative explanatory powers of each. The article classifies evidences into the following categories; evidence on contracting costs, evidence on debt maturity and priority, evidence on information cost and finally evidence on taxes.
After examining the theories of the corporate finance, it is prudent that certain consideration be put into place this article unfold some of the policies that can be adopted. For instance, implications for the dividends and other corporate policies have to be determined. Then finally, the article looks at the solution: integration of the stocks. And flows. Under this category, the article examines some of the available policies which are crucial in decision making process.
