Finance

The Determinants of Capital Structure

November 18, 2014

Better understanding of how companies react during economic crises, will help financial managers decide on the capital structure of their company, says TIAS alumni Theodorus Wisnu Widjaja in the thesis he wrote with Barry Harrison.

What is your thesis about?  

The title of my thesis is “The Determinants of Capital Structure: Comparison between Before and After Financial Crisis”. In brief, I try to understand the options of capital structure of a company which are equity and debt, and what influences a company to finance itself with equity or debt or a certain proportion of equity and debt. Furthermore, I took advantage of the 2008 financial crisis event, to look deeper whether the shock of the crisis also brought some impact towards the capital structure of companies.”  

How did you select the subject?  

“Capital structure choice is one of the most basic and important decisions on which financial managers should decide. The consequences of this decision immediately affect the bottom-line performance of a company. Too much equity could mean a company overlooks opportunity to increase after-tax profit by exploiting available tax shields. On the other hand, too much debt could mean increased risk of financial distress. Moreover, the 2008 financial crisis brought significant changes to the factors which theoretically influence the decision of capital structure. Therefore, it was a very interesting subject to research.”  

What is the impact of your findings?  

“The findings provide an insight into how the firms react in the period of crisis with regard to their capital structures. Which factors have a bigger influence, which factors are less significant. This could provide additional insight for financial managers in deciding the capital structure of their company, depending on the economic period. Financial managers could differentiate their capital structure preferences in a growing economy and prepare for when the signs of financial crisis are starting. Therefore, their companies could embrace the next financial crisis in a better shape.”  

Read The Economic Issues, Vol. 19, Part 2, 2014, that published the thesis of Barry Harrison and Theodorus Wisnu Widjaja.     

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