PECKING ORDER AND TRADE-OFF THEORIES IN FORMING CAPITAL STRUCTURE: AN IMPLEMENTATION IN TEXTILE INDUSTRY IN THE WEST MEDITERRANEAN REGION OF TURKEY

Abstract

Increasing competitive environment’s pressure on business organizations during globalization process and after it prompts finance managers to be more cautious about business financing and establishing capital structure. Capital structure decisions change capital components of business organizations and thus become more important in terms of decreasing capital cost and increasing firm value. Modigliani’s and Miller’s approach towards capital structure are the most outstanding ones among the studies related to this issue. It seems that this approach was adopted intensely first and developed by other studies which were done later; even from its drawbacks new capital structure approaches have been suggested. Since bankruptcy and agency cost, arising from excessive borrowing, and asymmetric information problem affect capital cost and firm value, they should be taken into account at least as much as tax advantage provided by the loan for establishing capital structure. In this paper, we tried to form a frame for capital structure at first and then mentioned about trade-off and pecking order theories on establishing capital structure. In the next stage, we referred to previous studies in literature concerning approaches adopted for establishing business organisations’ capital structures. In the last part, a field research, relating to the importance of factors which are taken into account while establishing capital structure in textile businesses, was applied, and analyses regarding the determination of current situation of active business organizations were done. We also applied face-to-face survey method in this study, and the analysis was carried out by subjecting hypotheses to t-test and chi square test with the help of SPSS packaged software.