Firm Value Determinants: Insights from Capital Structure and Financing Decisions

Abstract

Capital structure plays a crucial role in determining the value and financial stability of a firm. This study aims to examine the relationship between capital structure, financing decisions, and their implications for firm value from the perspective of trade-off theory and pecking order theory. A library research approach was employed to review scholarly literature published over the last five years. The findings indicate that an optimal capital structure is achieved by balancing risk and return, with financing decisions considering the minimization of the cost of capital and maintaining financial flexibility. Factors such as external funding needs, debt ratio, and asset management efficiency significantly influence corporate financial performance. Moreover, the results highlight that practical implementation often deviates from theoretical ideals due to managerial preferences and market conditions. This study reinforces the conceptual understanding of how strategic financing decisions can enhance firm value sustainably. By integrating insights from both trade-off theory and pecking order theory, the research guides managers in designing effective funding strategies that support long-term financial stability and growth.