The Theory Of Capital Structure & Companies' Financing

The theory of capital structure focuse on the ratio of liabilities to the equity, which is one of the vital fields of a company's financial administration. It means much for a company to make its decision for financing and dividends distribution. Modigliani and Miller created the modern analysis method of capital structure; Robichiq and Myers introduced the bankruptcy cost to the analysis of capital structure, and thought that the best capital structure would be obtained when the present value of marginal increasing tax value caused by liabilities is equal to the marginal bankruptcy cost. Their theory manifest the mainstream of modern theory of capital structure, having means of directing modern companies' financing decision.A company's financing decision determines its capital structure, but financing decision is often affected by present financial environment. The influence of macro-level elements cannot be ignored in spite of the fact that a company is free to make financing decision. Chinese reform of economic mechanism is continuing and the market environment is improving, but the financial environment fails in adapting the process of companies' marketization, which holds the attainment of funds. So we must quicken the reform of financial mechanism, and create external condition for optimizing companies' capital structure. The first part this article briefly reviews the development of the capital structure theory, pointing out the relation between the capital structure theory and the financing decision. The second part deals with the five main elements influencing the capital structure decision. The third part descripts the characteristics of Chinese companies' capital structure and the financing situation, analyzes from four aspects the reasons of their formation. The fourth part tells that we must establish a financing pattern adjusted to our condition to change the present financing situation and optimize the capital structure.