This report delves into key aspects of corporate finance, examining two prominent theories related to capital structure: the static trade-off theory, which balances financial distress costs with tax shield benefits, and the pecking order theory, which explains firms' preference for internal financing, followed by debt, and finally equity. It also analyzes empirical research on managerial discretion and its impact on leverage ratios. Furthermore, the report explores the role of financial markets in providing information, particularly through dividend policy, using the signaling hypothesis to demonstrate how dividend distributions can convey information about a company's prospects. Finally, it examines the firm's life cycle theory of dividends, highlighting how a firm's optimal dividend policy changes throughout its life cycle, from its early stages to maturity, and supports the role of lifecycle characteristics in dividend payment propensity.
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