Capital Structure The Miller and Modigliani theorem was first published in 1958 and was a revolutionary model in corporate finance. The M&M theorem on capital structure states that in an efficient market and in the absence of taxes, bankruptcy costs and information asymmetry, the value of a firm is not affected by how it is financed. That is, how the firm decides to raise capital, whether by taking on debt or using existing capital, does not affect the value of the firm. Market Timing and Capital Structure Baker and Wurgler's (2002) article discusses equity market timing, the practice of companies issuing shares when they are relatively expensive and buying them back when they are cheap. According to the MM model, the costs of different forms of capital do not vary independently because markets are efficient and integrated, but in practice companies use stock market timing. Analysis shows that stock market timing is successful on average, and companies tend to issue new shares when investors are too excited about future earnings; even managers admit to using market timing. Baker and Wurgler's article addresses the issue of how market timing affects capital structure. Fluctuations in market value have long-term effects on capital structure. It is difficult to explain this result within traditional theories of capital structure, for example pecking order. The pecking order should prevent managers from issuing new shares entirely. Zwiebel's (1996) managerial entrenchment theory of capital structure is partially consistent with market timing theory, but practice shows that managers are exploiting new investors instead of existing ones. Capital structure is the cumulative result of attempts to time the stock market. Fluctuations in the market-to-book ratio have significant and long-lasting effects on leverage. The paper shows that these results are more consistent with market timing theory. None of the trade-off, pecking and managerial entrenchment theories can explain the impact on capital structure. All of the theories mentioned above have some significant flaws. Market timing theory seems to be the best explanation of the empirical results, in the sense that capital structure is a cumulative result of attempts to time the market. It seems that other theories also have some explanatory power, and in some particular circumstances they may be more important than those of market timing. timing theory to explain changes in capital structure. But the authors showed that if we had to choose only one theory, the market timing theory would win because it has the greatest explanatory power. Capital structure and firm performanceBerger and Emilia (2003) used profit efficiency as a new approach to test corporate governance theory.