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date: 27 January 2021

Abstract and Keywords

This chapter reviews the literature on the determinants of firms’ financing decisions and suggests fruitful areas for future research. We describe the tradeoff, pecking order, and market timing theories of capital structure and assess the extent to which these theories are supported by empirical evidence. Although parts of the three theories are supported by empirical evidence, the totality of the evidence does not provide compelling support for any of the three theories. Hence, to a large extent, the determinants of firms’ financing policies remain a major puzzle in financial economics.

Keywords: capital structure, tradeoff theory, pecking order theory, market timing theory, agency costs, costs of financial distress

Leonce Bargeron

Leonce Bargeron is an Assistant Professor of Finance in the Joseph Katz School of Business at the University of Pittsburgh.

Kenneth Lehn

Kenneth Lehn is the Samuel A. McCullough Professor of Finance in the Joseph Katz School of Business at the University of Pittsburgh.

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