How Does Capital Structure Affect Market Structure

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Capital structure is a structure consist of various fund sources that is used in a firm. The structure is made out of debt and equity. Those two funds are more to long term and permanent compare to debt and equity in a financial structure. The long term funds are used to finance the firm’s assets which contributes to the firm’s operation and growth. A carefully build capital structure will contributes to a good market value. If a firm carries too much debt which increases the leverage will influence investors to retract their money. This will make the market value of a firm to decrease. Each of the funds in capital structure has its own cost to the firm. It is because debt and equity are provided by investors or also known as owners and creditors thus, the fund provider has their expectation and demands on the firm’s profitability and growth for long term. This is one of the firm’s concern when trying to balance the ratio between debt and equity. A firm market value refers to the market capitalisation of a public traded company. It is the value of a firm according to the stock market and it is determined by the supply and demand of investors and potential investors. The market value quoted in the stock market…show more content…
Does the capital structure affects their market value? Does the capital structure and market value related to each other? This research investigates the relationship between capital structure and market value of firms in Malaysia The importance of the capital structure towards the market value of firm has been debated by some theories over times such as the Modigliani and Miller’s capital structure theory(1950) that hypothesised that in a perfect market which has no taxes, it does not matter how the firm finance its operation. They state that the market value is determined by the ability to generate profit from its operation and its risk of its

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