Capital structure: professional management guidance

Abstract

Purpose

Capital structure decisions rely on a complex array of theoretical foundations and practical considerations. At the managerial level, it is impractical to base decisions purely on theory. While one can develop a perception of an optimal capital structure, the decision is often obscured by practical limitations to the theoretical base. In order to be useful to practicing managers, policies and decision techniques need to be efficiently accomplished and based on available information. This paper seeks to provide that practical framework.

Design/methodology/approach

This paper recounts the simple theoretical base for capital structure, highlights some of the problems encountered when applying the theory to reality, and suggests a framework for practical managerial decisions about capital structure. This exposition is especially useful in undergraduate business curricula, in particular for finance majors considering professional management as a career.

Findings

While application of traditional capital structure theory is often impractical, numerous tools are available for use by professional managers to make informed decisions about capital structure.

Practical implications

The conclusions from this paper provide a framework for current and prospective professional managers for making appropriate capital structure decisions in their management careers.

Social implications

Proper managerial techniques and considerations for leverage and capital structure can potentially benefit society through more prudent use of debt, based on the variety of measures presented in this paper.

Originality/value

Topics discussed in this paper have been in development since the 1950s. The contribution of this paper is the creation of a framework for understanding and applying these topics, for pedagogical and management training purposes.

Citation

Stretcher, R. and Johnson, S. (2011), "Capital structure: professional management guidance", Managerial Finance, Vol. 37 No. 8, pp. 788-804. https://doi.org/10.1108/03074351111146229