Dynamic capital structure and financial crisis
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In presence of the market frictions, firms aim to attain target capital structure by making strategic choices towards re-engineering the leverage. These choices influence not only firm’s investment patterns, capital costs and expected returns but also lead to conflict of interest among the stakeholders. The dynamic market forces make targeting a continuous exercise for the firm, as it strives to make optimal financing decisions to raise its value and reduce the risk of bankruptcy. An occurrence of acute financial crisis disturbs the capital structure and firms may foresee this and try to adjust. If adjustment is seen prior to a crisis in favour of higher leverage and moving away from the optimum capital structure, then it may signify cheaper adjusting costs and greater access to the debt financing. If adjustment takes place post crisis, then it means that valuable lessons are learnt and steps are taken to attain the optimum capital structure.
Capital structure , Capital cost , Financial crisis
Syed Quadri, Syed Adnan & Mohd Rasid, Mohamed Eskandar Shah. (2015). Dynamic capital structure and financial crisis. Research Bulletin, 7. Retrieved from http://www.inceif.org/research-bulletin/dynamic-capital-structure-and-financial-crisis-2/