CAPITAL STRUCTURE OF FIRMS: A SURVEY OF LITERATURE

Abstract

This paper surveys capital structure literature from emerging markets. It employed both the narrative and integrative approach in reviewing past studies in the capital structure literature. The review of findings of studies in the extant literature indicate that both firm specific and external factors are crucial in the analyses of capital structure of firms in emerging markets. Specifically, the findings indicate that most of the emerging market studies documents that firm specific factors such as profitability, firm risk, Asset
tangibility, growth opportunities, dividend, size and age are important and common firm specific drivers of capital structure of firms. In the same vein, financial development, inflation, interest rates, institutional quality were found to be crucial external variables that determine capital structure choice of firms. The review equally indicate that the prominent capital structure theories such as the Modigliani and Miller irrelevance theory, trade-off theory, agency cost theory pecking order theory and market timming theory have been found to be plausible in emerging markets. However, some of the reviewed make case for modifications of the theories to accommodate the high level of market imperfections in emerging markets. Equally, the paper found that the reviewed studies have employed several estimation methods ranging from the time series ordinary least squares method, static panel (random and fixed effects models) to the dynamic panel (Generalized method of moments) estimators to analyse the determinants of capital structure of firms in emerging market. Only few studies employed qualitative survey method. The paper therefore conclude that consensus is yet to be reached on the determinants of capital structure of firms in emerging markets and empirical studies in this area from the perspective of emerging markets is still very scanty compare to voluminous studies that have been carried out from the western developed markets in the United States and Europe.