Need an research paper on issues in corporate finance: trade-off theory. Needs to be 10 pages. Please no plagiarism. The trade-off theory of capital structure maintains the positive relationship between earnings and leverage. Empirical evidence, however, argues that such observation is fallible (Sarkar and Zapatero, 2003). Despite the contradicting outcomes, the trade-off has considered a valuable mechanism in gauging corporate revenues. In most instances, the trade-off theory has consistently predicted information related to debt structure. The theory suggests that weak firms are more inclined to finance exclusively with bank debts. Apparently, weak firms tend to ignore other debt sources in particular public debts.
Another important idea posited by the theory is that the optimal debt structure seen among strong firms pertains to combinations of bank and market debt. Basically, strong firms have become adept in successfully managing both bank and market debts. It has to be noted that the nature of both debts is differently perceived. Strong firms have the capacity to acquire different forms of debt instruments because of their financial scope. In uncertain markets, the strategy of using varied debt mechanisms allow strong firms to be more flexible in handling risks.
The concept developed by Modigliani and Miller (1958) revolves on the market imperfections that eventually affect capital structures. Indeed, market imperfections occur in several forms. The most prominent observed among firms include taxes, market distresses, and agency costs. For most firms, the challenge is to create an optimal capital structure when these market imperfections emerge. The theory assumes that after a certain firm establishes the optimal combination of financial resources all succeeding financing is raised in the same proportion of debt and equity financing. This, however, is expected to vary in the method of reporting and practicing. .