Capital Structure Theory: Past, Present, Future

Abstract

The purpose of this review is to analyze all existing theories of the capital structure (with their advantages and disadvantages) in order to understand all aspects of the problem and make correct management decisions in practice. The role of the capital structure is that the correct determination of the optimal capital structure allows the company’s management to maximize the capitalization of the company and the long-term goal of the function of any company. The review examines the state of the capital structure and capital cost theory from the middle of the last century, when the first quantitative theory was created, to the present. The two main theories, Modigliani–Miller (MM) and Brusov–Filatova–Orekhova (BFO), are discussed and analyzed, as well as their numerous modifications and generalizations. Additionally, discussed is the latest stage in the development of the theory of capital structure, which began a couple of years ago and is associated with the adaptation of the two main theories of capital structure (Brusov–Filatova–Orekhova and Modigliani–Miller) to establish the practice of the function of companies. This generalization takes into account the real conditions of the work of the companies. It was noted that taking into account some effects that are present in economic practice (such as variable income, frequent payments of tax on income, advance payments of tax on income, etc.) brings both theories closer, and even the Modigliani–Miller theory, with all its many limitations, becomes more applicable in economic practice. However, it should be remembered that the Modigliani–Miller theory is only true for perpetual companies, while the BFO theory is valid for companies of any age, and from this point of view, they never coincide.