Revisiting the Capital Structure Theories with Special Reference to India

Abstract

This review scrutinizes the role of different theories of capital structure in decision making regarding the choice of capital for firms. Authors survey the theories of capital structure, starting from the irrelevance theory of Modigliani and Miller, to the relevance ones like trade off, pecking order and the market timing. The paper presents the success and failures of the capital structure theories in developed as well as in developing nations with special focus on India. Literature shows that the two theories trade-off and pecking order have always dominated the capital structure decisions but recent theoretical and empirical work shows that market timing theory is challenging them as the managers are always keen to take advantage of "market timing”. So, an effort is required to develop powerful theoretical models for the market timing theory. Also, the extensive review on capital structure revealed the fact that there is limited work done for India. Hence, there is a need to work in the area of capital structure especially on the market timing theory.