Analysis of Contemporary Capital Structure Theorie

Contemporary research in the field of capital structure revealed three primary theories to describe firms' behavior in establishing a capital structure in order to maximize a firm's financial performance. The Pecking-Order Theory, the Trade-Off Theory, and the Market Timing theory each surfaced in recent decades to provide a method for a firm to maximize profitability through a lower cost of capital. Subsequent research indicated that managers of firms largely ignore these three theories when making decisions impacting the firm's capital structure. Although the vast trove of literature reveals this result, no indication is present as to why managers choose to avoid pursuing the methods prescribed by the theories. This study sought to uncover an answer to this question by evaluating firms' financial performance based on their choice of a capital structure theory.;The analysis included data from 382 firms from among the current S&P 500, evaluated over 20 years (when possible). Instances of adherence to any of the three theories designate a capital event. The firm's financial results in the quarters following the capital event indicate whether or not a firm experienced higher or lower financial performance as a result of this capital activity. The data analysis indicated no broad correlation exists between the application of a contemporary capital structure theory and that firm's financial performance.;While this result reveals a possible reason for firms' reluctance to consistently apply the theories, it ultimately raises more questions than answers. Each of the three theories is based on sound financial principles, however this research indicated that they do not deliver sound financial results. An opportunity exists for further research to revise or update these theories or to abandon these in search of another, more robust method for the determination of capital structure in a way that consistently delivers superior financial results.