Transaction Costs And Capital Structure Research

The MM theorem posed by Modigliani and Miller symbolized birth of modern capital structure theory, half century later, capital structure theories have developed numerous branches with plentiful contents. We believe that deepened understanding the economic nature of firm is the underlying force continuously driving capital structure theory moving ahead. Because capital structure decision is indeed a kind of firm behavior, thorough understanding the properties of firm organization such as functions, boundary etc. must help to more deeply understanding the inherent logic behind choice of capital structure. Observing existing capital structure theories with perspective, we find they are all closed related to specified viewpoint of firm. This paper tries to discuss optimal capital structure decision based on transaction cost view of firm. We know that transaction cost economics is one of main branches of modern firm theories; it is successfully applied to explain many aspects of properties and behavior of firm. However, capital structure theory within this framework has not been fully developed, in this paper, we try to some work extending and consummating existing literature.Debt and equity are two kinds of governance mode with different character; they express obvious different features in coordinating relationship between investors and firms. Debt govern transaction in a regular manner, in occasions involving high uncertainty and asset specificity, this kind governance structure will bring high bargaining costs when carrying ex post-adjustments, and so will harm value of continuity of operating. In contrast, equity as a kind of governance mode is more tolerant and elastic, and so can costs related to stubborn governance while its participating nature brings other kinds of costs such as incentive loss and bureaucracy cost. Such that, the choice of capital structure is determined by properties of transactions organized by a specified firm; the aim of saving transaction cost can be achieved by matching the type of governance structure to characters of transaction.An important extending of above transaction cost analysis is to absorb some thoughts from principal-agency framework, which is aiming to put the understanding of capital structure choice on a more unified firm theory. Seeing that principal-agency framework and transaction costs economics both depict only some aspects of real firms, we discuss the possibility of integrating the two theories. We believe that firm should be treaded as a kind of organization form can provide both ex ante-incentive and ex post-adjustments; the generation of this organization type is to accommodate problems rising from asymmetric information and incomplete information. Based on this, we argue that capital structure...