Capital Structure Decision Making in Privately Held Firms: Beyond the Finance Paradigm

Abstract

Capital structure theories grounded in the finance paradigm (agency theory, transaction cost theory) have contributed to our understanding of capital structure decision making. However, they do not address the intricacies of capital structure decision making from a managerial choice perspective, especially in privately held firms. This article brings together research from strategic management, decision sciences, and social psychology to develop a conceptual model for understanding capital structure decision making in privately held firms. In general, it is posited that capital structure decisions are influenced by the firm owner's attitude toward debt as moderated by external environmental conditions. Attitude toward debt is a function of one's belief about debt as influenced by the individual's need for control, risk propensity, experience, social norms, and personal net worth. The integration of theoretical perspectives yields eight propositions for understanding the determinants of privately held firm capital structure.