Theories on How Companies Deal With Debt and Financial DistressCompanies can use two popular theories to conceptualize their capital structure. Pecking Order (POT) and Trade-Off (TOT) are always used interchangeably when proving organizations are seeking to ease their way of making capital structure decisions. The following study elucidates the differences between the two theories.
The Pecking Order vs. Trade-Off
The Trade-Off Theory refers to the concept that a company chooses how much equity finance and how much debt finance to use through balancing the benefits and costs (Agarwal, 2013). This theory explains that organizations are often financed partly with equity and partly with debt. Pecking Order Theory argues that the cost of financing increases with asymmetric data. There are three sources of financing for a company: internal funds, new and debt equity. Firms prioritize their financing sources. First, they prefer preferring internal financing, and then debt, lastly equity is used as the last resort. This implies they use internal financing first when this is depleted; they use debt, and when it is no more sensible to solicit debt, they turn to equity (Puntaier, 2010).
The TOT addresses the limitations seen as inconsistent with the advantage behavior provided some level of information (Agarwal, 2013). This theory postulates that organizations would naturally finance new investments using debts as against equity; first to trade-off tax liabilities and then second to cause some level of scarcity on the stock...
Human Resources Managing Organisational Culture The values and behaviors that contribute to the unique social and psychological environment of an organization make up the organizations culture. Organizational culture is the summation total of an organization's past and current suppositions, incidents, viewpoint, and values that hold it together, and is articulated in its self-image, inner workings, connections with the outside world, and future prospects. In dealing with the management of organisational culture, it is
While the first chapter was brief, it is important to explain what will be studied and then move forward into the literature review. In Chapter 2, the literature review provides a review of academic literature by way of journals and textbooks. This information is placed into separate sections which allow for ease of understanding. An introduction is made to capital structure, and information is given on the Indian capital structure
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