A Comprehensive Review On Capital Structure Theories

The Romanian Economic Journal
Year XV no. 45 September 2012

3

The aim of this article is to provide a comprehensive review on different theories
and hypothesis in regard with achieving an optimal capital structure. Many
researchers believed that capital structure includes share issuance, private
investment, bank debt, business debts, leasing contracts, tax debt, retirement debt,
deferred compensation for executives and employees, deposits, product related-debt
and other probable debt. These theories and hypothesis include: Net income, Net
operational income, Traditional approach theory, Miller and Modigliani theory,
tatic trade!off theory, "symmetric of the information hypothesis, #ecking order
theory, ignaling theory, "gency cost theory, $ree cash flow hypothesis, %ynamic
trade-off theory and Market Timing theory. &y applying these theories, the analysts
will be able to reach a maximum return with minimum risk while they increase the
value of corporation. &ecause of the close relationship between profitability and
capital structure, this paper is going to suggest a new model called genetic algorithm
model by using support vector regression and profitability factors for obtaining an
international range of optimal capital structure.

1
Hamed Ahmadinia, Lecturer, Accounting Department, Management and Accounting
Faculty, Shahre E Ray Branch, Islamic Azad University, e-mail:
hamed.ahmadinia@aol.com (Corresponding author)
2
Javad Afrasiabishani , Lecturer, Business Administration Department, Management
and Economic Faculty, Parand Branch, Islamic Azad University
3
Elham Hesami, M.A Industrial Management Department, Management and
Accounting Faculty, South Branch, Islamic Azad University
A Comprehensive Review
on Capital Structure Theories

Hamed Ahmadinia
1

Javad Afrasiabishani
2

Elham Hesami
3



4

'eywords: #rofit Margin, upport (ector )egression, *nternational +ptimal
,apital tructure, -everage, .enetic "lgorithm
/0- ,lassifications: .11, .23

Introduction
The studies on capital structure, especially optimal capital structure
and tracking its results are highly regarded by many beneficiaries. The
beneficiaries include researchers, senior corporate managers, financial
managers and investors within the universities and industries. Their
interest results from the necessity to answer the following questions:
1. When should they finance?
. Which is the best way when they decide to finance? !ake use of
leverage or issuance of shares?
". Which option will be more beneficial if they decide to borrow?
#$ong%term debt or short%term debt&
'. (f they decide to issue shares, which group of stocks should be
issued and why? )lternatively, maybe, it is better to use retained
profits to finance.
*ifferent theories and hypothesis were presented by many
researchers hoping to reach an optimal capital structure. These
theories and hypothesis include: +et income, net operational income,
traditional approach theory, !iller and !odigliani theory, static trade%
off theory, asymmetric of the information hypothesis, pecking order
theory, signaling theory, agency cost theory, free cash flow hypothesis,
dynamic trade%off theory and market timing theory. ,n one hand,
these theories describe various financing methods, but none have been
able to provide optimi-ed model. ./perimental results continued in
this direction are also inconsistent and controversial. 0y applying these
theories, they were to provide a model to reach the ma/imum return
with minimum risk and increase the value of corporations. 1ince the
determinants of capital structure are great, many models were


5
presented by scientists like Titman and Wessels #1233& entitled
$(14.$ model and 5hen 6ang, 7ew, $ee, 8iang, 9u and Wen, $ee
#::2& entitled !(!(5 model to evaluate them. 1ome of the
determinants used by !(!(5 model follow as: ./pected growth,
stock return, uniqueness, asset structure, profitability, volatility,
industry classification, leverage, si-e, value, liquidity, $ong term
reversal and momentum.
Fiure 1
!ath diaram of the structural model "#I#IC$

Capital
Structure
Stock
Return
Asset
Structure
Uniqueness
Growth
Size
Profitability
Volatility
Industry
! Re"ersal
#o$entu$
Value
iquidity

(n addition to mentioned factors, many other determinants e/ist that
was applied by other researchers in other models. 1ome of them
include: ;istorical market <to book ratio #!aha=an and Tartaroglu,
::3&, political risk #*esai, 7oley and ;ines ::3&, financial distress
and competitiveness #>asiliou and *askalakis,::2&, subsidiary


6
debt#kolasinski,::2&, common law legal origin, burden of proof,
investor protection, disclosure requirements and public enforcement
#!ishra and Tannous, :1:&, ownership #5espedes, 9on-ale- and
!olina,:1:& and efficiency #!argaritis and ?sillaki, :1:&. 0ecause of
close relationship between profitability and capital structure, this paper
is going to apply genetic algorithm model, support vector regression
and profitability factor in order to reach an international range of
optimal capital structure hoping to find an international point of
optimal capital structure in the future.

Conceptual framewor%& relevant literature& review and
bac%round studies
*etermination of a target capital structure and consequently, a target
debt ratio, like to what capital structure theories describe, emplaces in
the range of prescriptive theories but what distract it from the target
'

cannot be answered under the prescriptive theory. 4esponse to these
questions is categori-ed in the domain of proof theories because it
results from the real world. 7urthermore, since the sub=ect of capital
structure is based on the concept of partial equilibrium analysis
#neglect the secondary variables in order to consider the impact of
main variables on topics of interest&, many scientists, over the years,
tried to analy-e the structure of capital by presentation of new
theories, take into account of new determinants or both of them.
0efore describing the relevant literature of capital structure together
with the introduction of researchers of this scientific branch in detail,
this paper will present an overview of capital structure theories below:

%& 'eter$inants like profitability( size( return and so on&


7
Table 1
Theories and approaches of capital structure
+o Theory@
)pproach
.ffect#1& .ffect#& 4esults
1
+et (ncome
)pproach#+(&
$A BC, ?A >A

+et ,perating
(ncome
)pproach#+,(&
$A K

"
Traditional
)pproach
$A BC >A
$A K

$A BA >C
'
!iller and
!odigliani
)pproach
#+on%debt ta/
shield&

#debt ta/ shield&
$A BA, 4A >C
$A BC >A
D
1tatic Trade ,ff
Theory
$A
BC
7inancial
*istressA
Trade%off
E>A
F
)symmetric of
(nformation
;ypothesis
)symmetric of
information between
shareholders and
investorsA
Gndervalue
of shares for
new
investmentA
0enefit for
new
investorsA
loss for
current
shareholdersA
H
?ecking ,rder
Theory
7irst internal sources
and then e/ternal
1ourcesA
.ndeavor to
invest on
positive net
present value
pro=ectsA
7ist, benefit
for present
shareholders
and then an
opportunity
for new
investorsA



8
3 1ignaling Theory
7inancial decisions
are signals for
investorsA
%%%%%%%%%%%%%%%%%
)symmetric
of
information
can be solved
by signaling
theoryA
2
)gency 5ost
Theory
5onflict of interest
between management
,shareholders and
creditorsA
%%%%%%%%%%%%%%%%% >C
5onflict of interest
between management
,shareholders and
creditorsC
%%%%%%%%%%%%%%%%% >A
1:
7ree 5ash flow
;ypothesis
$A
*ividendA
)gency
5ostC
>A
11
*ynamic trade
,ff
5orrect future
forecastingA
%%%%%%%%%%%%%%%%% >A
(ncorrect future
forecastingA
%%%%%%%%%%%%%%%%% >C
1
!arket Timing
Theory
,vervalue of sharesA
(ssuing new
shares
>A
Gndervalue of
sharesA
0uyback
their shares
>A
$I $everage, BI 5ost of capital, >I >alue, 4I ./pected return, AI increase and
CI decrease

1. +et income approach #+(&: (n a long term with the
combination of low%cost source of financing #more debt& and
e/pensive source of financing #less stock& in capital structure, a
firm reaches a descending cost. 9reater use of debt in capital
structure will reduce capital e/penditure. (t means that weighted
average cost of capital and stock price is influenced by the
degree of financial leverage. (n this theory, there is no belief to
reach an optimal capital structure. #!undy, 122&



9
Fiure '
The conceptual fiure of (I

Ke
t J
Kd
t E
K
t

Bd: 5ost of debt, Be: 5ost of share issuance, B: 5apital cost and T:
Ta/

. +et operating income approach #+,(&: (n this approach, like the
previous one, the idea of optimal capital structure does not e/ist. (n
this approach, the hidden cost of debt was identified by *urand.
5onsequently, hidden cost of debt fades the benefits of using debt as a
cheaper source of finance #0aum and 5rosby, 1233&.



10
Fiure )
The conceptual fiure of (*I

Kd
t J
Marginal
Cost
Ke
t E
K
t
Bd: 5ost of debt, Be: 5ost of share issuance, B: 5apital cost and T:
Ta/

Fiure +
Evident versus hidden cost of debt

Debit
Evident
Cost
Latent
Cost
Interest
Cost
Debit
Cost
Debit
Ratio
Equity
Ratio
Firm
Risk
Investors
tend to
invest
Exe!ted
Return o"
#$are
$olders

. Traditional approach: it is based on the belief that optimal
capital structure always e/ists, and we can increase the value of
firms by making use of leverage. (t is a combination of two
previous approaches #+( and +,(&. (t has three stages. The


11
range that capital cost is the least is called optimal range of
financial leverage #stage ((&, and the capital structure of this area
is called optimal capital structure.

Fiure ,
The Conceptual Fiure of Traditional approach

K
)
Ke
Kd
*d
*e
*
I
II
III

1econd stage #((&: shareholders awareness of companyKs risk.
Third stage #(((&: shareholders and creditors awareness of companyKs
risk.
". !iller and !odigliani theory: their well%known theory #*ebt ta/
shield and non%debt ta/ shield& is based on several assumptions
as followings: perfect and frictionless markets, no transaction
costs, no default risk, no ta/ation, both firms and investors can
borrow at the same interest rate.



12
Fiure -
The Conceptual Fiure of #iller and #odiliani theor.

'%1& +on%debt ta/ shield #capital structure irrelevance&: !ore or less
use of debt in capital structure brings no benefits for the company.
'%& *ebt ta/ shield #ta/ benefits&: because debt composes a ta/ shield,
the higher proportion of leverage will be of benefit to each company
concerned it and it will decrease the capital cost. (n this theory, !iller
and !odigliani consciously neglect some debt obligations like financial
distress and bankruptcy.
D. 1tatic trade%off theory:
Lensen and !eckling #12HF& suggest that the firmMs optimal capital
structure will involve the tradeoff among the effects of corporate and
personal ta/es, bankruptcy costs and agency costs, etc. Trade%,ff
theory suggests that corporate should consider a reasonable debt ratio
and tries to achieve this goal in a long term. Through this way, a firm
can benefit greatly by using of debt as a cheap source of financing.
Ta/ saving is one of the advantages that results from using of debt and
consequently, the cost of potential financial distress is considered as a
disadvantage of using debt, especially when the firm relies on too
a v e r a g e c o s t o f
c a p i t a l
d e b t / e q u i t y r a t i o
M - M M - M


13
much debt. This theory suggests a trade%off between the ta/ benefit
and the disadvantage of higher risk of financial distress.

-/ As.mmetric of information h.pothesis0
(n capital structureKs theories, asymmetric of information means that
in comparison with e/ternal investors, managers have more
information about the rate of internal cash flows, investment
opportunities and, generally, about the future landscape and real value
of the company. $ess information of e/ternal investors can lead to
undervaluation of shares. There for information disclosure must be
regarded regularly as an important factor. )symmetric information
means a situation in which one party in a transaction has more
superior information compared to another. (t could be a harmful
situation because one party can take advantage of the other partyKs
lack of knowledge. (t can also lead to two main problems:
1& adverse selection & moral ha-ard #(nvestopedia glossary&.
H& ?ecking order theory of financing choice:
?ecking order theory is the consequence of )symmetric information
#!yers, 123'&. The pecking order theory does not take an optimal
capital structure as a starting point, but instead asserts that firms prefer
to use internal finance #as retained earnings or e/cess liquid assets&
over e/ternal finance. (f internal funds are not enough to finance
investment opportunities, firms may or may not acquire e/ternal
financing, and if they do, they will choose among the different e/ternal
finance sources in such a way as to minimi-e additional costs of
asymmetric information. (n order to minimi-e e/ternal cost of
financing, firms prefer to use debt leverage at first, then issuance of
preferred stock and finally issuance of common stock. The results of
pecking order theory follow as: internally generated funds first,
followed by respectively low%risk debt financing and share financing.
The pecking order theory regards the market%to%book ratio as a
measure of investment opportunities. .mpirical evidence supports


14
both the pecking order and the trade%off theory. .mpirical tests to see
whether the pecking order or the trade%off theory is a better predictor
of observed capital structures find support for both theories of capital
structure.
3& 1ignaling theory: financial decisions are signals sent to investors by
managers in order to compensate information asymmetry. These
signals are regarded as the main core of financial relationships.
2& )gency cost theory:
(t proposes that the optimal capital structure is determined by agency
cost, which results from conflict of interest among different
beneficiaries #Lensen and !ackling, 12HF&.
2%1& 5onflict of interests between managers and stakeholders.
2%& 5onflict of interests between stakeholders and holders of
corporate debt securities.
1:& 7ree cash flow hypothesis:
7ree cash flow is the amount of cash that a company has left over
after it has paid all of its e/penses, including investments
#(nvestopedia glossary&. (t is important because it allows a company to
pursue opportunities that enhance shareholder value. Without cash,
itKs tough to develop new products, make acquisitions, pay dividends
and reduce debt #(nvestopedia glossary&. 4elated to capital structure,
this theory e/presses that mitigation of free cash flow by paying
interest of debt and dividends prevent a manager from probable
deviations to abuse companyKs income for personal purposes. 0ecause
of law requirements, paying the principal and interest of debt is
preferred to paying dividends to diminish the level of free cash flow
#Lensen, 123F&.
11& *ynamic trade%off theory:
5onstructing a timing model of market requires identifying a number
of aspects that are typically ignored in a single%period model.
./pectations and ad=ustment costs play important roles in dynamic
trade%off theory. (n a dynamic model, the correct financing decision


15
typically depends on the financing margin that the firm anticipates in
the ne/t period. 1ome firms e/pect to pay out funds in the ne/t
period, while others e/pect to raise funds. (f funds are to be raised,
they may take the form of debt or equity. !ore generally, a firm
undertakes a combination of these actions.
)n important precursor to modern dynamic trade%off theories was
1tieglit- #12H"&, who e/amines the effects of ta/ation from a public
finance perspective. 1tieglit-Ks model is not a trade%off theory, since he
took the drastic step of assuming away uncertainty.
The first dynamic models to consider the ta/ savings versus
bankruptcy cost trade%off are Bane et al. #123'& and 0rennan and
1chwart- #123'&. 0oth analy-ed continuous time models with
uncertainty, ta/es, and bankruptcy costs, but no transaction costs.
1ince firms react to adverse shocks immediately by rebalancing
costlessly, firms maintain high levels of debt to take advantage of the
ta/ savings. !uch of the work on dynamic trade%off models is fairly
recent and so any =udgments on their results must be somewhat
tentative. This work has already fundamentally altered our
understanding of mean reversion, the role of profits, the role of
retained earnings, and path dependence. )s a result, the trade%off class
of models now appears to be much more promising than it did even
=ust a few years ago.
1& !arket timing theory:
The market%timing theory of capital structure argues that firms time
their equity issues as follows:
1%1& They issue new stock when the stock price is perceived to be
overvalued, and buy back own shares when there is undervaluation.
5onsequently, fluctuations in stock prices affect firmMs capital
structures. There are two versions of equity market timing that lead to
similar capital structure dynamics. The theory assumptions are:
The first assumes economic agents to be rational.


16
The second theory assumes the economic agents to be irrational
#0aker and Wurgler, ::&.
1%& !anagers issue equity when they believe itMs cost is irrationally
low and repurchase equity when they believe itMs cost is irrationally
high. (t is important to know that the second version of market timing
does not require that the market actually be inefficient. (t does not ask
managers to successfully predict stock returns. The assumption is
simply that managers believe that they can time the market. (n a study
by 9raham and ;arvey #::1&, managers admitted trying to time the
equity market, and most of those that have considered issuing the
common stock report that Nthe amount by which our stock is
undervalued or over% valuedN was an important consideration. 0aker
and Wurgler #::& provide evidence that equity market timing has a
persistent effect on the capital structure of the firm.
1%"& 5ompanies tend to stock issuance only when they ensure that
investors are interested in future profit of the company.
1%'& (n regard to market timing, managers believe that increase or
decrease the volume of shares effect on stock buying and selling
#!alcom and wurgler, :::&.

Capital structure and profitabilit.0
!any researchers believe that capital structure includes share issuance,
private investment, bank debt, business debts, leasing contracts, ta/
debt, retirement debt, deferred compensation for e/ecutives and
employees, deposits, product related%debt and other probable debt.
5apital structure is usually measured by the following ratios: ratio of
debt to total asset, the equity ratio to total asset, a debt ratio to the
equity and equity ratio to debt.
?rofitability is defined as the ability of a firm to gain profit.
?rofitability is the result of all financial plans and decisions. The ratio
of profit to sell, return on asset #4,)& and return on equity #4,.& are
generally applied to measure profitability.


17
9enetic )lgorithm:
9enetic algorithm is one of the e/ploration algorithms that find the
answer randomly. This algorithm, which is a trial%and%error algorithm,
first presented by ;olland and performs based on genetic of living
animals, factors and circumstances that are effective on their life. This
method is based on *arvinKs theory that emphasis on the principle of
survival of the strongest animals. This algorithm is used to solve
comple/ optimi-ation problems that no special laws e/ist for them.
To solve a problem by using this method, and also to evaluate the
responses, you should represent the theorical responses of the
problem in a special way. There are several ways to display and coding
that the most common and important of them are binary way and
floating decimal view. )t first, the initial population that shows the
answers is randomly selected. .ach member of the population called
chromosomes is one of the problem responses. .ach of these
chromosomes is selected from the series of numbers with equal length
that is called a gene. 9enetic algorithm based on repetition. The
population of each repetition or act is called generation. The members
of this generation are evaluated based on a value function. (n this
process, new generation tries to assign a higher value of function in
order to be closed to the target. (n each repetition, chromosomes are
married to each other with a certain probability, and its consequence is
one or some new chromosomes that are called O5hild.N ) mutation
with a special probability may occur in children and consequently, the
amounts of one or more genes change. (n the final stage, children are
being evaluated according to value function. +ew generation is
generated based on the children value and parents value #the first
generation that produced these children&. This process is repeated
until the present generation will converge to the optimum solution or
the optimum sub%solution. There are different mutant and cross
operators who are chosen based on the comple/ity of the problem.
1upport vector regression:


18
1upport vector regression is a variety of regressions that its theory is
defined as follows: suppose that the training data follow as, where 8
represents the input patterns.
{(x
1
, y
1
), (x
2
, y
2
), (x
3
, y
3
), , (x
, y
)] X R
(n the regression of e SI the aim is to find the function of f#/&
where the ma/imum output difference of f#/& #y
or x
& from real y

become equal to e for total training data, and the function of f#/&
remain with no curve like a straight%line.
(x) =< w, x > +b witb w e X, b e R
Where P.,.Q reveal the inner product in the space of 8, and no curve
in f#/& means little #w&. ,ne way to ensure is to minimi-e the norm of
#w& where this problem can be solved as a conve/ optimi-ation
problem.
minimizc
1
2
[w[
2

Sub]cct to ]
<w,x
t
>+b-y
t
<s
y
t-<w,x
t
>-b<s

(n most cases, a number of deviations from the actual amount of data
are more than e. This leads to a new generali-ed theory of 1>. This
problem will be solved by making use of new formula, and with the
arrival of new variables called R #covariates&.
minimizc
1
2
[w[
2
+C (
-
)
=1

Sub]cct to _
<w,x
i
>+b-
i
<s+{
i
{
i
,{
i
-
>0
i-<w,x
i
>-b<s+(
i

7igure H shows this problem graphically. This problem can be resolved
as a dual problem.



19
Fiure 1
Support vector reression

0ased on above mentioned theories, a lot of researches have been
done regarding the capital structure. (t seems the inception of these
researches goes back to early 12D:s and scientists like linter #12DF&,
;irshlifer #12D3& and !odigliani and !iller #12D3&. ;owever, the
related researches were done before. )fter the mentioned researchers,
the most basic related researches belong to Lensen and meckling#12H2&
about Otheory of economical unitS, managers behavior, agency cost
and capital structure with an emphasis on static trade%off theory.
!yers and !a=luf#123'& that e/amined determinants of capital
structure from the asymmetric of information perspective. !yers
#123'& regarded the mystery of capital structure and presentation of
pecking order theory of financing choice in his paper. Titman and
Wessels #1233& studied the capital structure determinants. *avid
)len#122"& tested pecking order theory on )ustralian capital market.
4a=an and Tingales #122D& with a paper entitled Owhat do we know
about capital structure? 1ome international evidenceS e/amined capital
structure. )ngel and Techner#::'& e/amined the effects of dynamic
capital structure on credit risk, 5hingfu, )lice, $ee and 5heng,
$ee#::H& in a study carried out =ointly between the state university of
+ew Lersey and 1an 7rancisco state university, identified growth as the
most important factor in capital structure that is affected by


20
profitability, capability of liquidation, non%ta/ed debt and special
values.
*esai, 7oley and ;ines #::3& from ;arvard and !ichigan Gniversity
studied multinational firms of Gnited 1tates from 123 to1222. They
reached a conclusion that fluctuation of capital return in a high%risk
country is more than that of other low%risk countries. )s a result, the
multinational firms decrees their leverage level in order to diminish
risk, !aha=an and Tartaroglu#::3& from Te/as university and Wichita
state university, with a paper entitled O.quity market timing and
capital structure international evidenceS, e/amined market timing
theory in 9H countries. 4esults proved that leverage is negatively
related to the historical market%to%book ratio in all 9%H countries.
>asiliou and *askalaskis #::2& from 9reece, studied the different
institutional characteristics on capital structure in 9reek firms
compared to other countries firms from :: to ::'. The results
showed that 9reek firms avoid long term debt for three reasons: 1&
$ower development of 9reek financial intermediaries relative to other
countries.& (ncrease of capital during previous years #1223%:::& as
much as possible. "&
Take more attention to disadvantages of leverage, namely the financial
distress, than its benefits, i.e. ta/ shield or lowering agency costs of
equity. (n another research 5hen 6ang, $ee, 9u and Wen $ee, #::2&
appraised co%determination of capital structure and stock return in
Taiwan 1tock market by applying $(14.$ model. Two e/ternal
factors of profitability and growth were identified as common
determinants between debt ratio and stock return. 0oth are negatively
related to leverage and positively to stock return. !ishra and Tannous
#:1:& from 5anada assessed multinational and nonfinancial firms of
5anada during :::%::1 by making use of $T* #long term debt&
model. They looked for finding whether the stock laws of the host
countries have an impact on G.1. multinational firms or not. 4esults
propose that long%term debt is positively related to following factors:


21
1& 7irm common law legal origin
& 0urden of proof
"& (nvestor protection
'& *isclosure requirements
D& ?ublic enforcement.
(t is also negatively related to political risk. 5espedes, 9on-ale- and
!olina #:1:& investigated 3:F $atin )merican firms since 122F%::D.
They e/amined determinants of capital structure. 4esults propose that
ownership based firms avoid issuing shares because they donKt want to
lose or to decrease the control right of the firm. 7inally, !argarits and
?sillaki #:1:& studied the relationship between capital structure,
ownership and firm performance in 7rench firms since ::%::".
4esults demonstrated that use of debt in capital structure leads to
augmentation in stock price. They indicated that the impact of
efficiency on leverage is positive. They also represented that
concentrated%ownership structure firms utili-e more debt in their
structures.
Conclusion0
This paper mentioned many different theories of capital structure. (n
net income approach #+(& and net operating income approach #+,(&
is no belief to reach an optimal capital structure but traditional
approach is based on the belief that optimal capital structure always
a/ists, this approach is acombination of #+(& and #+,(&. !iller and
!odigliani theory includes: +on debt ta/ shield that capital structure
bring no benefits for company, and debt ta/ shield that the higher
proportion of leverage will be of benefit to company. 1tatic trade <off
theory suggest trade%off between the ta/ benefit and disadvantage of
higher risk of financial distress. )symmetric of the information
hypothesis managers have information about the rate of internal cash
flows but less information of e/ternal investor can lead to
undervaluation of shares. ?ecking order theory regards the market%to%
book ratio as a measure of investment opportunities. 1ignaling theory


22
that financial decisions are signals sent to investor by managers in
order to compensate information asymmetry. )gency cost theory has
" conflict of interest for different beneficiaries. 7ree cash flow
hypothesis that it is important because it allows a company to pursue
opportunities that enhance shareholder value. *ynamic trade%off
theory that e/ception and ad=ustment costs play important roles in
dynamic trade%off theory, in this model, the correct financing decision
typically depends on the financing margin that the firm anticipates in
the ne/t period. !arket timing theory of capital structure argues that
firms time has important roles.
(n this study, the close relationship between profitability and
capital structure cause to apply genetic algorithm model, support
vector regression and profitability factor to reach an international
range of optimal capital structure hoping to find an international point
of capital structure. (t is vitally important that investors be aware of
ratios of capital structure such as: ratio of debt total asset, the equity
ratio to total asset, a debt ratio to the equity and equity rate to debt.
)lso #4,(& and #4,.& are generally applied to measure profitability.
9enetic algorithm model is used to solve comple/ optimi-ation
problem that no especial laws e/ist for them and support vector
regression that it is a mathematic method to reach ma/imum outputs.
7inally, this paper indicate that a lot of researches have been done
regarding the capital structure, the most important factors in capital
structure that is affected by profitability, capability of liquidation, non%
ta/ed debt and special values. )t the another studies identified two
e/ternal factors of profitability and growth were identified as common
determinants between debt ratio and stock return, 0oth are negatively
related to leverage and positively to stock return. 4esults propose that
long%term debt is positively related to following factors:1& 7irm
common law legal origin & 0urden of proof "& (nvestor protection '&
*isclosure requirements D& ?ublic enforcement. )lso have e/amined
determinants of capital structure, results propose that ownership based


23
firms avoid issuing shares because they donKt want to lose or to
decrease the control right of the firm. They indicated that the impact
of efficiency on leverage is positive and represented that concentrated%
ownership structure firms utili-e more debt in their structures.

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