Summary

John R Gram wrote the evidence from the field published in 2001 examines the cost of capital, capital budgeting and capital structure, and describes the current practice of corporate finance. Big companies rely on the net present value (NPV) techniques which is used to analyze the profitability of a projected investment. Instead, small companies tending to use the payback period (PB) which is the length of time required to recover the cost of an investment. The problem is that many executives are not following capital structure theory which they learn from school to value projects and to estimate the cost of equity. It shows that old theory, capital structure theory, is weak and not working well, and need to make new capital structure theory. NPV and the PB are more generally followed than capital structure theory because they are more precise than capital structure theory. By changing old theory, it makes students simple to understand and valuable in their future.

 

I believe that Graham and Harvey make a strong case in support of changing capital structure theory which is not working well in modern day, and it must be fully implemented by academic institution. By changing old capital structure theory, it makes student easy to understand what going on in real financial field. Moreover, nobody want to learn old theory which does not work in real life. In my opinion, I strongly agree with the author because It is logically acceptable to make a new theory if an old theory is not working well in the business field. Therefore, it is proven that the executives are not following the capital structure theory what they learn from universities because they know that capital structure theory is not working well in their business. Therefore, I think it is good to change a thing that is not right. There some people who say that it is not good to change old theory because it is tradition, but I think that in business we need to adapt to the changes of the market. Therefore, I totally agree with Graham and Harvey that we must change old capital structure theory to new one that valuable to use in business field.

 

Source Citation:

John R Graham, Campbell R Harvey, The theory and practice of corporate finance: evidence from the field, Journal of Financial Economics, Volume 60, Issues 2–3, 2001, Pages 187-243, ISSN 0304-405X, https://doi.org/10.1016/S0304-405X(01)00044-7. (http://www.sciencedirect.com/science/article/pii/S0304405X01000447) Keywords: Capital structure; Cost of capital; Cost of equity; Capital budgeting; Discount rates; Project valuation; Survey