Capital Structure Decisions: Evaluating Risk and Uncertainty

Preface

CAPITAL STRUCTURE DECISIONS WORLDWIDE are a mystery, the solution of which has the ability to work wonders—wonders that the human mind is intrigued by, enough to repeat and reinvent them. Success stories and surprising failures both rest their cases on the financial strength or weakness of a firm, secured and generated by human ingenuity. As students of finance, we may restrict our understanding of capital structures to the path-breaking work of Modigliani and Miller that laid the foundation for behavioural finance way back in 1963. Myers’s (1984) work laid the foundations for the capital structure puzzle that intrigues many of us as academicians, researchers, and practitioners. Strategic placement of the decision and its optimality have several dimensions of risk and uncertainty that most corporate finance books ignore. While looking for a standard solution to the decision-making process, we find none that fits the bill for all firms in a given region or a specific industry or even the same firm in different time periods. Capital structures are neither similar nor stable across firms, industries, and regions. Several empirical research studies and theoretical explanations provide a plausible explanation, yet there are more dilemmas than solutions available in hand, dilemmas that constantly challenge the ability of every working finance executive to perform better than his predecessors. Decision makers strive to make informed decisions, whether these ultimately turn out ...