Capital Structure Theories

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Questions and Answers

Which theory emphasizes the importance of rationality and the reduction of asymmetric information between management and shareholders?

Agency Theory

What does market timing theory suggest firms should do when their share price is overvalued?

Repurchase stock

What is the main focus of capital structure theories?

Debt and equity balance

Which version of the market timing theory suggests that managers issue equity when the cost of equity is low?

2nd version Signup and view all the answers

What does the pecking order theory suggest firms should do when market interest rates are low?

Issue debt Signup and view all the answers

Match the following concepts with their descriptions:

Agency Theory = Helps explain conflicts between managers and shareholders in capital structure decisions Managerial Behavior = Tendencies of managers to prioritize their own interests and the importance of acting in the shareholders' benefit Monitoring and Control = Role played by shareholders in monitoring and controlling managers and the cost associated with such monitoring Pecking Order Theory = How agency theory leads to the development of this theory Signup and view all the answers

Match the following actions with the responsible party:

Prioritizing own interests over shareholders = Managers Controlling managers = Shareholders Acting in the shareholders' benefit = Managers Monitoring managers = Shareholders Signup and view all the answers

Match the following theories with their main focus:

Agency Theory = Conflicts between managers and shareholders Pecking Order Theory = Hierarchy of financing sources Managerial Behavior = Tendencies and obligations of managers Monitoring and Control = Role of shareholders in managing the company Signup and view all the answers

Match the following roles with the associated costs:

Managers = Conflict of interest with shareholders Shareholders = Costs of monitoring and controlling managers Agency Theory = Conflict resolution between managers and shareholders Pecking Order Theory = Hierarchy of financing costs Signup and view all the answers

Match the following obligations with the responsible party:

Prioritize shareholders' interests = Managers Monitor and control managers = Shareholders Resolve conflicts between managers and shareholders = Agency Theory Establish hierarchy of financing sources = Pecking Order Theory Signup and view all the answers