Decisions about capital structure determine a firm’s ability to invest, to survive downturns and to create jobs in local communities. The Modigliani and Miller insight from Franco Modigliani at Massachusetts Institute of Technology and Merton Miller at the University of Chicago established the baseline that financing mixes do not alter firm value in a frictionless world, and that departures from that ideal reveal the real trade-offs managers face. Evidence compiled by the International Monetary Fund highlights how macroeconomic cycles and access to credit shape corporate leverage across countries, making capital structure both a financial and territorial concern.
Theoretical foundations
Trade-off, pecking order and agency perspectives guide practical choices. Stewart C. Myers at MIT Sloan introduced the pecking order idea that firms prefer internal funds and then cheaper external debt, while Michael C. Jensen at Harvard Business School emphasized agency costs that leverage can discipline managers but also create risk for bondholders. These complementary theories explain why optimal targets are not universal: tax benefits of debt, the cost of financial distress and information asymmetries differ by industry, ownership and governance.
Practical determinants
Institutional context and culture matter. Research by Rafael La Porta at Harvard University and colleagues links legal protections and investor rights to varying capital structures between market-based and bank-based systems, and European Central Bank analysis shows that continental banking relationships influence longer-term lending patterns. Environmental and territorial risks add new dimensions; analysis from the International Energy Agency points to transition risks for resource-intensive firms that should reduce leverage to avoid forcing asset sales in constrained markets. Human factors such as managerial incentives, labor relations and regional economic dependence on large employers also affect acceptable leverage thresholds.
Implementation guidance flows from these realities. Firms should define a flexible target range rather than a single ratio, preserving liquidity through committed credit lines and staged maturities to smooth refinancing risk. Governance measures that align incentives toward sustainable investment reduce costly short-termism described by academic studies. Regularly stress testing capital plans against local economic scenarios, regulatory shifts and sectoral transition pathways produces a capital structure that balances tax and financing advantages with the cultural, environmental and territorial stakes unique to each firm.
