Capital structure substitution theory

<p>In <a href="/facts/Finance/fLh1GgN8">finance</a>, the capital structure substitution theory  (CSS) describes the relationship between earnings, stock price and <a href="/facts/Capital_structure/QvaskVso">capital structure</a> of public companies. The CSS theory hypothesizes that managements of public companies manipulate capital structure such that <a href="/facts/Earnings_per_share/MJukxPNg">earnings per share</a> (EPS) are maximized. Managements have an <a href="/facts/Incentive/eWAy7odC">incentive</a> to do so because shareholders and analysts value EPS growth. The theory is used to explain trends in capital structure, <a href="/facts/Valuation_(finance)/ubVtk8RG">stock market valuation</a>, <a href="/facts/Dividend_decision/cFTFoY9I">dividend policy</a>, the <a href="/facts/Monetary_transmission_mechanism/SL2tBEmV">monetary transmission mechanism</a>, and <a href="/facts/Volatility_(finance)/mCdus1MW">stock volatility</a>, and provides an alternative to the <a href="/facts/Modigliani%25E2%2580%2593Miller_theorem/8DyhCsgf">Modigliani–Miller theorem</a> that has limited descriptive validity in real markets. The CSS theory is only applicable in markets where <a href="/facts/Share_repurchases/WkFnam7r">share repurchases</a> are allowed. Investors can use the CSS theory to identify undervalued stocks.
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Capital structure substitution theory open-in-new

Capital structure substitution theory