Capital Structure Decisions: Evaluating Risk and Uncertainty

Chapter Eleven

Economy-Driven Capital Structure Practises

EMPIRICALLY, IT HAS BEEN found that capital structures are not portable from one firm to another, and neither are they portable across industries or countries. Theories suggest that it should be a simple procedure to identify the mix: first, identify the cost and benefits, and then, wherever they optimise, select the mix. Realistically, however, it is not so simple for senior management either to identify the model that gives them the correct mix or to estimate the effects of their action. Devising a structure is an art gained through practise and an understanding of the industry. There is no substitute for experience, which can be enhanced by understanding and studying the practises followed globally.

UNDERSTANDING CAPITAL STRUCTURE PRACTISES

Capital forms do not originate and optimise on a single day for a firm or at its birth. The process is an evolving one. Dynamic models of capital structures suggest that adjustments in structures take place over years before firms arrive at an optimal or target capital structure. No one model gives the solution to the different managerial problems a firm faces. Most models form explanations that consider factors in isolation and may not be able to estimate or forecast the interactions of several interconnected variables. While understanding and developing knowledge of such structures, a firm may always find it useful to look at the prevailing practises in the country of origin for ...