CHAPTER 2 LITERATURE REVIEW This chapter represents the literature review of the determinants in capital structure. This chapter is mainly discussed on the overview of capital structure theories and the empirical evidence of firms-specific determinants of capital structure in Malaysia’s plantation sector. Various theoretical and empirical studies have been developed since the seminal theory by Modigliani and Miller (1958) to enhance the discussion of the theory. 2.1 Overview of Capital Structure Theories Many theories and numerous studies had attempted to explain the prior capital structure theory which was first introduced by Modigliani and Miller (Myers, 1977; Bradley, 1984; Jensen, 1986; Titman and Wessels; 1988). Over time, the researchers had included several economic variables and identified
extensive theories to enhance the theory of capital structure. The theories include the tradeoff theory (Modigliani and Miller, 1963; Jensen and Meckling, 1976; DeAngelo and Masulis, 1980) and pecking order theory (Myers and Majluf, 1984, Sunder and Myers, 1992). 2.1.1 Modigliani-Miller (MM) Theorem The earliest and most influential study of capital structure was first initiated by Franco Modigliani and Merton H. Miller in 1958 on the technique of defining the most optimum financial strategies and decisions. The Modigliani-Miller theorem introduced the first proposition theory of capital structure on the basic assumptions
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