REVIEW ON CAPITAL STRUCTURE (KEY IJP************550)

• Bhadrappa Haralayya

Abstract

Capital structure refers to the mix of debt and equity that a company employs to finance its operations and growth. It is a critical financial decision for businesses as it directly impacts their profitability, risk, and overall financial stability. This abstract explores the theoretical foundations and practical implications of capital structure decisions, highlighting the interplay between cost of capital, risk, and shareholder value. Theories such as the Modigliani-Miller Proposition, Trade-Off Theory, Pecking Order Theory, and Agency Cost Theory provide a conceptual framework for understanding how firms determine their capital structure. Each theory emphasizes different factors, including tax advantages of debt, bankruptcy costs, asymmetric information, and agency conflicts, shaping managerial decisions. In practice, companies strive to achieve an optimal capital structure that balances the benefits of debt financing, such as tax shields, with the risks of financial distress and loss of financial flexibility. Industry-specific factors, macroeconomic conditions, and company-specific attributes, such as profitability, asset structure, and growth potential, significantly influence these decisions.