Financial theories associated with financial distress – A systematic review.

meghna jain

Abstract

Decisions related to capital structure are not easy, it is important that such a structure is optimal, and debt and equity mix needs to be appropriate for further handling the operations of business. The management of the business finds it difficult to plan their capital structure. Modigliani and Miller (1958) in their study, discussed about interest as an expense which is a tax-deductible expense, hence the companies need to raise their debt in the capital structure so that they could receive tax benefit. Additionally, it would increase the employment of debt which means that there will be increase in the worth of the said business. It can be said that deployment of debt is beneficial to a certain level, but when the firm goes beyond a certain level then the firm will feel some financial burden. A systematic assessment of financial ideas related to financial distress The need of keeping a healthy capital structure is emphasized as this systematic review explores the financial theories related to financial crisis. It looks at how debt and equity interact, the effects of excessive leverage, and the points at which financial distress is unavoidable. This study offers insights into how companies might maximize their capital structure to reduce financial risks and guarantee sustainability by examining theoretical frameworks and empirical data. Making wise capital structure choices is essential for protecting the company from future problems as well as improving financial performance.