Why Capital Structure Matters: The Corporate Finance Revolution

Glenn Yago and Susanne Trimbath

in Beyond Junk Bonds

Published in print May 2003 | ISBN: 9780195149234
Published online November 2003 | e-ISBN: 9780199871865 | DOI:
Why Capital Structure Matters: The Corporate Finance Revolution

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The chapter starts by presenting a brief history of capital structure theory and research. After that it goes on to discuss the corporate finance revolution, which was catalyzed by the rise of the high‐yield securities market, and demonstrated that a company could reduce its cost of capital and raise its stock price by increasing the liquidity of its securities. Solving the capital structure puzzle – how a company divides its capital along the debt‐to‐equity continuum to support its business strategy and activities in a way that maximizes current company value – became central to the financial and business strategy in setting the leverage ratio; furthermore, substituting debt for equity has been shown to add value. The rest of the chapter discusses the high‐yield market and the real economy in light of the facts that the relationship between financial markets, complex capital structure, and economic growth has become increasingly apparent, and that the linkages between the means and methods of financing firms and the future of the economy as a whole have become increasingly clear. It ends by discussing the implications of recent developments in the high‐yield market.

Keywords: capital structure; capital structure theory; corporate finance; debt; economic growth; equity; high‐yield markets; high‐yield securities; leverage ratio; liquidity; market

Chapter.  8151 words.  Illustrated.

Subjects: Financial Markets

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