Proceedings

companies, we found a statistical significant negative correlation between financial
leverage and PER ratio. More exactly, one can argue that for an emergent market,
with severe restrictions on financial resources supply side, the choice of the capital
structure implies a tradeoff between external sources represented mainly by banking
credit and limited appeal to the financing opportunities through the capital market
(Pirtea et al., 2010).
The paper is organized as follows. The next section highlights theoretical
considerations regarding the main theories of capital structure, financial leverage and
value of the company. The third section briefly describes the methodological
framework, where for an empirical research we try to search for a relation between
financial leverage and main variables of the company. The data characteristics and the
results are reported in this section, whilst the last section summarizes the conclusions
of the paper.
1. LITERATURE REVIEW
One of the longest-standing questions about capital structure is whether companies
have target debt ratios. The most important arguments for what could determine
capital structure is trade-off theory and the pecking order theory. These two theories
are reviewed, but neither of them provides a complete description of the situation and
why some companies prefer equity and others debt under different circumstances.
These theories are conditional, not general. It is easy to find examples of each theory
at work, but otherwise difficult to distinguish the theories empirically. Large, safe
companies with mostly tangible assets tend to borrow more. Companies with high
profitability and valuable growth opportunities tend to borrow less. Each of these
tendencies is consistent with two or more of the major theories of financing.
Theoretical models developed seem to explain differently if the data is divided into
several generic groups of companies.
The trade-off theory says that companies have optimal debt-equity ratios, which
determine by trading off the benefits of debt with the costs (Graham & Harvey, 2001).
In traditional trade-off models, the chief benefit of debt is the tax advantage of interest
deductibility (Modigliani & Miller, 1963). The primary costs are those associated with
financial distress and the personal tax expense bondholders incur when they receive
interest income (Miller, 1977).
The pecking-order model of financing choice assumes that companies do not target a
specific debt ratio, but instead use external financing only when internal funds are
insufficient. External funds are less desirable because informational asymmetries
between management and investors imply that external funds are undervalued in
relation to the degree of asymmetry (Myers & Majluf, 1984). Therefore, if companies
use external funds, they prefer to use debt, convertible securities, and, as a last resort,
equity.
1.1. The trade-off theory
Jensen argues that debt is an efficient means by which to reduce the agency costs
associated with equity (Jensen, 1986). Klaus and Litzenberger show that with the tax
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