Financing the Firm

Abstract

The financial policy of corporate firms has been generally depicted in the economic literature in terms of “puzzles”: “capital structure puzzle”, “debt- existence puzzle”, “dividend puzzle”… These puzzles are the result of the old divorce or evident contradictions existing between economic theory and economic facts when considering corporate finance. The first, in its general equilibrium orthodox version, concludes to the irrelevance of the capital structure of the firms; the second shows the interest of the firms in finance when designing their strategy, and, the close influence of differences and shifts in financial structure on their performances. In fact, as stated by Stiglitz (1969), the decisions of the firm can be divided into four groups:

• How should the firm finance its investment?

• How should the firm distribute its revenue?

• How much should the firm invest?

• Which projects should the firm undertake (or what techniques of production should the firm employ?).