Corporate sector growth is vital to economic development. The issue of finance has been identified as an immediate reason why businesses in developing countries fail to start or to progress. It is imperative for firms to be able to finance their activities and grow over time if they are ever to play an increasing and predominant role in providing employment as well as income in terms of profits, dividends and wages to households. So, a path to development could not be realized without enabling to evaluate the business environmental factors particularly factors affecting access to finance. Consequently, managerial decisions related to finance are at the center of the economic or business activities, which are the subject matter of financial management discipline.
Financial management discipline has three major decision functions/activities:
i. Capital budgeting (Investment) Decision: deal with the efficient utilization of capital or funds to acquire assets. It is more concerned with the size, type and percentage composition of assets of a firm.
ii. Capital structure (financing) decisions: emphasize on the proper selection of mix of capital i.e. debt vs. equity. It deals mainly with the size, type and percentage composition of capital sources.
iii. Asset management decision: is the other decision area that deal with efficient utilization of assets, being acquired through investment decision. Here, the literature focuses on capital structure decisions’ general theories, and particularly the related determinants of capital structure.
Definition of Capital Structure
Capital structure as comprising of debt, equity or hybrid securities issued by the firm
From the definitions given by many previous researchers, capital structure of a firm describes the way in which a firm raise capital needed to establish and expand its business activities. It is a mixture of various types of equity and debt capital a firm maintains, resulting from the firm’s financing decisions. The amount of debt that a firm uses to finance its assets is called leverage. A firm with a lot of debt in its capital structure is said to be highly levered. A firm with no debt is said to be unlevered
