This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided.
THE MODERN THEORY OF capital structure began with the celebrated paper of
Modigliani and Miller (1958). They (MM) pointed the direction that such theories must take by showing under what conditions capital structure isirrelevant. Since then, many economists have followed the path they mapped. Now, some 30 years later it seems appropriate to take stock of where this research stands and where it is going. Our goal in this survey is to synthesize the recent literature, summarize its results, relate these to the known empirical evidence, and suggest promising avenues for future research.1As stated, however, this goal is too ambitious to result in a careful understanding of the state of capital structure research. Consequently, we have chosen to narrow the scope of our inquiry. First, we focus on the theory of capital structure. Although we discuss the empirical literature as it relates to the predictions of theory, we make no attempt to give a comprehensive survey of this literature. We simply take the empirical results at face value and do not review or criticize the methods used in these papers. Second, we
298The Journal of Finance arbitrarily exclude theories based primarily on tax considerations. While such theories are undoubtedly of great empirical importance, we believe that they have been adequately surveyed.2 Moreover, tax-based research is not our comparative advantage. Third, we systematically exclude certain topics that, while related to capital structure theory, do not have this theory as their central focus. These include literature dealing with the call or conversion of securities, dividend theories, bond covenants and maturity, bankruptcy law, pricing and method of issuance of new securities, and preferred stock. In short, we concentrate on nontax-driven capital structure theories.Although the above considerations exclude many papers, a fairly large literature remains. To highlight the current state of the art, we consider mainly papers written since 1980. The only exception to this statement is the inclusion of papers written in the mid-to-late 1970's that serve as the foundation for the more recent literature. A diligent search of both published and unpublished research meeting the above criteria for inclusion resulted in over 150 papers. Obviously, we could not survey all these papers here in detail. Consequently, we were forced to...
