Private Equity and Venture Capital in Europe

3.1. Theories about Corporation Financing

Leading theories of capital structure attempt to explain the proportion of debt and equity on a corporation’s balance sheet. Most research assumes that the firms requiring sources are public, involved in non-financial business, and raising capital primarily from outside investors rather than from the firm’s entrepreneurs, managers, or employees.

There is no universal theory of capital structure, and there are no reasons to expect one. There are useful conditional theories, but they differ in their relative emphasis on the factors that could affect the choice between debt and equity, such as agency costs, taxes, differences in information, and the effects of market imperfections or institutional or regulatory ...