The_determinants_capital_structure_plantation_industry_Chapter2_Part1.docx

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