SpletThe trade-off theory is the first concept prevalent in the literature related to SMEs. Accordingtoitsstaticversion,whenshapingtheircapitalstructure,companiescomparethe … Spletthe trade-off and pecking-order theories. The first theory defends the existence of an optimal debt ratio. Firms choose debt finance or equity finance by comparing the tax benefits of debt with the dead-weight costs of bankruptcy (Kraus, Litzenberger, 1973). The second theory does not support the same view: firms will try to avoid external fi-
A State-Preference Model of Optimal Financial Leverage - JSTOR
SpletTrade-off theory argues that company chooses debt and equity mix by balancing the benefits and costs of debt. If company increases its leverage, the tax benefits of debt increase, as well. At the same time, the costs of debt also rise (Kraus and Litzenberger, 1973). The pecking order theory expects a negative relationship and the trade- Spletvery important in explaining corporate capital structure decisions: (i) Trade-Off Theory (Kraus and Litzenberger 1973; Scott 1977; Kim 1978) and (ii) Pecking Order Theory ... Kraus & Litzenberger, 1973) and agency costs incurred between owners as well as financial creditors (Jensen & Meckling, 1976; Myers, 1977) stand out because of debt levels ... flood defences meaning
The Kraus-Litzenberger Zero-sum Trade-off Theory
SpletSupported by the trade-off theory, Kraus & Litzenberger (1973) state that the optimal capital structure can be done by loosening tax assumptions, considering bankruptcy costs associated with debt payments. Debts costs arise from bankruptcy costs both directly and indirectly through increased financial risk ( Kim, 1978; Kraus & Litzenberger, 1973 ). SpletThe Trade-Off Theory of Capital Structure employs to the concept that a firm is able to manipulate the levels of debt and equity finance by balancing the costs and benefits to be most advantageously structured. As mentioned in the introduction it goes back to Kraus and Litzenberger who considered a balance between the dead-weight costs of ... Splet1971 to 1989. In the paper, they embody the pecking order theory in a basic model, indicating the external debt financing driven by the internal financial deficit, and adopt a target adjustment model as the proxy for the static tradeoff theory. They find that the pecking order model has greater time-series explanatory power than the tradeoff model. flood defender washing machine hose