Capital Structure in the Modern World

266 Pages·2016·5.59 MB·English

by  Anton Miglo (auth.)

Capital Structure in
the Modern World
Anton
Miglo
Capital Structure in the Modern World

Anton   M iglo
Capital Structure in
the Modern World
Anton   Miglo
Nipissing University, Ontario , Canada
ISBN 978-3-319-30712-1 ISBN 978-3-319-30713-8 (eBook)
DOI 10.1007/978-3-319-30713-8
Library of Congress Control Number: 2016940577
© Th e Editor(s) (if applicable) and Th e Author(s) 2016
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To my parents Alla and Viktor.

Prefa ce
Capital structure is a very interesting and probably one of the most con-
troversial areas of fi nance. It is an area of permanent battles between dif-
ferent managers defending their favorite approaches, between theorists
and practitioners looking at the same problems under diff erent angles,
and between professors and students since the area is complicated
and requires a superior knowledge of econometrics, microeconomics,
accounting, mathematics, game theory etc. Many of the results obtained
in capital structure theory over the last 50–60 years have been very infl u-
ential and led their authors to great international recognition. Among the
researchers who contributed signifi cantly to capital structure theory, note
Nobel Prize Award winners Franco Modigliani, Merton Miller, Joseph
Stiglitz, and most recently Jean Tirole. Although until recently capital
structure theories did not have strong support from practitioners and
were too complicated to teach at colleges and business schools, they are
quickly gaining recognition at universities and in the real world. Th is
fi eld has become extremely intriguing to potential employees and stu-
dents. Th e roles of investment banker and corporate treasurer, which
require fundamental capital structure education, are very popular.
Th is book focuses on the microeconomic foundations of capital struc-
ture theory. Some areas are based on traditional cost-benefi t analyses,
but most include analyses of diff erent market imperfections, primarily
asymmetric information, moral hazard problems and, more recently
vii
viii Preface
d eveloped, imperfections involving incomplete contracts. Knowledge of
game theory and contract theory prior to reading this book is benefi cial
but I aim to present the material in the most accessible way possible,
with lots of examples for readers with diff erent levels of knowledge. For
additional readings in the fi eld of capital structure, I recommend C apital
Structure and Corporate Financing Decisions (edited by. Baker and Martin,
2011) and F inancing Growth in Canada (edited by Halpern, 1997). Both
of these editions have a more applied approach to capital structure,
including empirical research and econometrics, and cover a lot of inter-
esting topics relating to capital structure and fi nancing decisions. I would
also recommend the journalofcapitalstructure.com website dedicated to
capital structure discussions.
Th is book attempts to explain the basic concepts of capital structure
as well as more advanced topics in a consistent fashion. Th e fi rst part
is focused on providing an introduction to the major theories of capi-
tal structure: Modigliani and Miller’s irrelevance result, trade-off theory,
pecking-order theory, asset substitution, credit rationing, and debt over-
hang. I think that the majority of the basic ideas in capital structure
compliment each other quite logically although signifi cant disagreement
between researchers still exists about which theory is more important in
practice. Part II discusses such topics as capital structure and a fi rm’s per-
formance, capital structure and corporate governance, capital structure of
small and start-up companies, corporate fi nancing versus project fi nanc-
ing and examples of optimal capital structure analyses for some compa-
nies. Many advanced theories of capital structure discussed in Part II are
still growing areas of research. At the same time, the objective of the book
is not to cover as many topics of capital structure as possible but rather to
review the major theoretical concepts and provide basic tools to under-
stand the complicated area of capital structure.
Many of the existing ideas of capital structure were created by “inject-
ing” a new type of market imperfection into diff erent capital structure
analyses. From my experience, the comprehension of this fact is crucial
to understanding the theory of capital structure. At the beginning of my
PhD studies I was spending a lot of time explaining to my adviser why
debt fi nancing and equity fi nancing create diff erent degrees of risk for a
company. At the time, I was surprised not to see an extremely enthusiastic
Preface ix
reaction to my “discoveries” from my PhD adviser who was mostly point-
ing to the importance of market imperfections in my research. When
teaching capital structure in my classes, I am always primarily concerned
with how well students understand the diff erence between perfect and
imperfect markets. Th e challenge for me has been to explain the impor-
tance of the marginal diff erences in models’ assumptions. Th ese diff er-
ences are often responsible for large variations in models’ predictions and
their capacities to explain existing empirical evidence. It has been a fasci-
nating experience for me to see how much progress students demonstrate
in understanding diff erent fi nancial concepts.
Th is book was inspired by over 20 years of my experience in capital
structure research. I was also inspired by my experience with teaching
fi nance courses at diff erent universities in Europe and North America
including courses directly related to capital structure such as Financing
Strategies and Corporate Governance, Advanced Corporate Finance,
Financial Management II, and Entrepreneurial Finance. It was also
inspired by my working experiences in areas of capital structure man-
agement including issuing stocks and bonds in commercial banks. Th e
fi nancial crisis of 2008 and 2009 also provided extra motivation. It
seemed that many companies faced problems that stemmed from their
fi nancing policies. Some discussions in this book are devoted to this
topic.
Anton Miglo
North Bay, Ontario, Canada
References
Baker, H., & Martin, G. (Eds.). (2011). C apital structure and corporate
fi nancing decisions, Robert W. Kolb series in Finance. John Wiley and
Sons, Inc.
Halpern, P. (Ed.). (1997). F inancing growth in Canada . University of
Calgary Press.