This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided. THE MODERN THEORY OF capital structure began with the celebrated paper of Modigliani and Miller (1958). They (MM) pointed the direction that such theories must take by showing under what conditions capital structure isirrelevant. Since then, many economists have followed the path they mapped. Now, some 30 years later it seems appropriate to take stock of where this research stands and where it is going. Our goal in this survey is to synthesize the recent literature, summarize its results, relate these to the known empirical evidence, and suggest promising avenues for future research.1As stated, however, this goal is too ambitious to result in a careful understanding of the state of capital structure research. Consequently, we have chosen to narrow the scope of our inquiry. First, we focus on the theory of capital structure. Although we discuss the empirical literature as it relates to the predictions of theory, we make no attempt to give a comprehensive survey of this literature. We simply take the empirical results at face value and do not review or criticize the methods used in these papers. Second, we 298The Journal of Finance arbitrarily exclude theories based primarily on tax considerations. While such theories are undoubtedly of great empirical importance, we believe that they have been adequately surveyed.2 Moreover, tax-based research is not our comparative advantage. Third, we systematically exclude certain topics that, while related to capital structure theory, do not have this theory as their central focus. These include literature dealing with the call or conversion of securities, dividend theories, bond covenants and maturity, bankruptcy law, pricing and method of issuance of new securities, and preferred stock. In short, we concentrate on nontax-driven capital structure theories.Although the above considerations exclude many papers, a fairly large literature remains. To highlight the current state of the art, we consider mainly papers written since 1980. The only exception to this statement is the inclusion of papers written in the mid-to-late 1970's that serve as the foundation for the more recent literature. A diligent search of both published and unpublished research meeting the above criteria for inclusion resulted in over 150 papers. Obviously, we could not survey all these papers here in detail. Consequently, we were forced to...

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This paper provides a theory of capital structure based on the effect of debt on investors' information about the firm and on their ability to oversee management. We postulate that managers are reluctant to relinquish control and unwilling to provide information that could result in such an outcome. Debt is a disciplining device because default allows creditors the option to force the firm into liquidation and generates information useful to investors. We characterize the time path of the debt level and obtain comparative statics results on the debt level, bond yield, probability of default, probability of reorganization, etc.

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This paper considers the question: How should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager? Obviously if the divisions (as represented by their managers) are indifferent among various allocations of the resource, the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie. The resource allocation problem can then be solved under complete (or at least symmetric) information. This aspect is a flaw in much of the recent literature on this topic, i.e., there is nothing in the models considered which makes divisions prefer one allocation over another. Thus, although in some cases elaborate allocation schemes are proposed and analyzed, they are really unnecessary. In the model we develop, a division can produce the same output with less managerial effort if it is allocated more resources, and effort is costly to the manager. We further assume that this effort is unobservable by the headquarters, so that it cannot infer divisional productivity from data on divisional output and managerial effort. Given these assumptions, we seek an optimal resource allocation process. Our results show that certain types of transfer pricing schemes are optimal. In particular, if there are no potentially binding capacity constraints on production of the resource, then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters. Division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price. Resources are allocated on the basis of the chosen transfer prices. If there is a potentially binding constraint on resource production, a somewhat more complicated, but similar, scheme is required.organization design, asymmetric information, transfer pricing