Table of Content
3. LITERATURE REVIEW
4. EXISTING THEORIES
4.1 MM THEORY
4.2 TRADE OFF THEORY
4.3. PECKING ORDER THEORY
4.4 FREE CASH FLOW THEORY
5 SPECIALTIES IN EMERGING ECONOMIES
5.1 CAPITAL STRUCTURE DEPARTS FROM THE CLASSICAL MODEL IN EMERGING EUROPEAN ECONOMIES
5.2 SPECIALTIES WITHIN THE ECONOMIC ENVIRONMENT AND EXPLANATIONS FOR DIFFERENT CAPITAL STRUCTURES
5.3 REFLECTION ON SELECTED CAPITAL STRUCTURE RESEARCH IN CEE COUNTRIES
5.4 PREFERRED CAPITAL STRUCTURE CHOICE IN CEE COUNTRIES
5.5 IMPLICATIONS OF THE CAPITAL STRUCTURE CHOICE
Taking into consideration the assumptions behind classical capital structures on the one hand and the specific economic environment and the resulting behavior of firms in the emerging European economies on the other hand, it is clear that these extraordinary circumstances (different political and economic systems) influence the determination of the firms’ capital structures in these countries in a special way. The goal of this paper is to determine the driving factors for different capital structure choices in emerging European economies, compared to the one we can see for instance in Western European countries. As a result of the underlying research on this topic and also considering the fact that shareholders are slowly gaining influence in businesses in emerging European economies (like Slovenia), the financial principal behavior of these companies will probably remain different from those in mature market economies. One of the most interesting findings regarding the research topic is probably the fact that we can find a re-designed Pecking Order Theory in some Eastern and Central European (CEE) economies.
The study of capital structure attempts to explain the mix of securities and financing sources used by corporations to finance real investments (Stewart C. Myers, 2001, 81). Generally speaking, entrepreneurs and managers need to make two major decisions. First, they need to decide which investment decisions/projects create the most value, and they have to decide which combination of capital sourcing is the best choice for the underlying investment (Hawawini and Viallet 2007, 379). How managers should select value creating projects, will not be discussed in the following chapters. This paper will show how a value creating capital structure should be designed, especially under the context of regional characteristics in emerging European economies like Poland, Slovenia and Hungary. Managers can choose from a variety of sources of funds to finance their business. How decision makers should combine debt and equity financing to establish a capital structure that maximizes the value of the firm´s assets will also be briefly discussed in the following pages.
3. Literature Review
In the early 1960s Franco Modigliani and Merton Miller formed with their “M&M capital structure irrelevance proposition” the basis for modern thinking on capital structure. Over the years numerous studies and books on capital structure theory still use these first results as a starting point in modern literature and combine it with taxes, bankruptcy costs and financial distress.
This research paper elaborates on the concept of how and why the classical capital structure theories differ in emerging European countries like Poland, Slovenia and Hungary. Standard literature in the field of Capital Structure Theory was used out of first class International Corporate Finance Books from Brealey and Myers; Hawawini and Viallet or Ross, Westerfield, Jaffe and Jordan. A lot of empirical and theoretical research has been done on capital structures for enterprises in developed countries. However this is not true for capital structure choices in emerging European countries. Some research in this field has been done, but it is not as developed as for western economies, nevertheless fundamental differences appear. This interesting field of determinants of capital structure choices in emerging European economies becomes slowly more and more popular in the academic world and publications in different A-Journals can be found, for instance from Crnigoj and Mramor or Kinga Mazur to name just a few. But after a solid literature research and to support the opinions from financial economic experts, it can be concluded, that the key forces behind capital structure decisions in emerging European economies remain a puzzle.