Optimal Proportions of Capital Structure under Different Influential Factors

Abstract

Noting the absence of articles addressing how each company should choose the optimal proportion of capital structure, this paper explores the best proportion selection of a company's capital structure under the influence of various factors. Firstly, a concise summary of existing theories on capital structure is provided. Subsequently, this paper focuses on two influencing factors: company industry and country of operation. For each factor, further subdivisions are made. Industries are categorized into three types: heavy assets with long cycles, light assets with short cycles, and research and development. Likewise, countries are divided into developed and developing countries. For each scenario, the optimal proportion of debt and equity is explored. The conclusion is that heavy asset with long cycles tends to have a larger proportion of debt, while light asset with short cycles and research and development industries tends to have a higher proportion of equity. Developed countries have substantial proportions of both debt and equity, leaning more towards equity financing. In contrast, developing countries face relatively more challenges in accessing both debt and equity financing and, therefore, rely more on debt financing.