Dynamics of Capital Structure

The firm’s financing policy is not only influenced by trade-off between the tax advantages of debt financing, recapitalization and financial distress costs but also by exogenous financial developments and liberalization policies. In recent years after the recurrent financial crisis the leverage behaviour has attracted considerable interest as the high debt ration signals out a major cause of financial crisis. The book extends the theoretical study of optimal capital structure by introducing the financial development in the corporate sector in a deterministic capital structure theory. The firm''s financing behaviour is described in a dynamic model with firm specific variables and the state of financial liberalization. The study''s aim is to propose and test a natural explanation of how financial liberalization might affect financial leverage. If liberalization policy has a significant linkage with financial leverage and it tends to increase use of debt relative to equity financing, this will this will have implications for the likelihood of bankruptcy and for the pace and amplitude of business cycle fluctuations.