Capital Structure and Agency Theory

2813 Words May 9th, 2012 12 Pages
1.0 Introduction
The maximization of the company’s value has long been the objective of financial management. In order to create more value for business organizations, how to comprehensively make the most effective investment, financing and operating decisions becomes more crucial. Among these decisions, the optimization of capital structure has a great influence on the performance of the companies, for a reasonable capital structure can decrease the financing cost, take advantage of the financial leverage and play an important role in corporation governance. Given the importance of capital structure, this essay will firstly discuss the ways that capital structure affects corporation value, then it will introduce the influencing factors of
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Therefore, the constant increase of debt ratio will not elevate the corporation value all the way. When the anticipated maiginal benefits of debt is equal to its anticipated marginal costs, the optimum capital structure emerges.

2.5 From the perspective of corporate governance
In the changing process of the corporation’s capital structure, with the transfer of the capital, there exists the change of rights and obligations. As the respective stakeholders are sure to define the use of capital, the allocation of yields, the control and other related rights and obligations relationships, the choice of capital structure in these processes will influence the corporate governance from various ways.

First, due to the voting right of ordinary shares instead of the debt, the capital structure will necessarily affect the allocation of control rights so as to affect the value of the corporation. The stand out function is the hard constraint of debt financing, which will improve the governance structure and decrease the agency cost. In addition, it will contribute to the improvement of corporate performance through the pressure of repayment of principle and interest as well as going into administration.

Second, a reasonable capital structure and equity structure will encourage the managers to act for the maximization of shareholders’