A Theoretical Revision of Capital Structure, in a Negative Rate Environment

Abstract

Purpose: This thesis sets out to comprehensively investigate the repercussions of negative interest rate environments on corporate financing decisions and the enhancement of shareholder value, especially within the context of the zero lower bound breaking. By scrutinizing established capital structure theories and valuation methodologies, it aims to gain insights into the ways in which negative rates influence the financial strategies adopted by companies. Through this exploration, it endeavours to shed light on the mechanisms through which companies navigate and adapt to the challenges posed by negative interest rate environments, ultimately contributing to a deeper understanding of corporate finance in such contexts.
Methodology: Employing a primarily theoretical approach, this study delves into seminal works such as Modigliani and Miller's propositions, the static trade-off theory, and the pecking order theory. These frameworks are examined within the context of removing the constraint of the zero lower bound, allowing for a nuanced understanding of how companies manoeuvre within negative interest rate environments. It's important to note that due to the theoretical nature of the study and limited empirical data available, there may be limitations to the validity and reliability of the findings.
Findings/Conclusion: The analysis in this study unveils significant ships in capital structure dynamics propelled by negative interest rates. Traditional advantages of debt financing dwindle, leading to a notable shift towards 100% equity financing among companies. Moreover, the study presents an alternative rendition of M&M's propositions I and II from the asset side of the balance sheet, aimed at creating a new tax shield. This highlights the necessity for companies to adapt and innovate in their financial strategies to bolster shareholder value. These revelations underscore the critical importance of strategic flexibility and adaptability in corporate financial decision-making amid changing economic landscapes.