Determinants of Firm’s Financial Leverage: A Critical Review

Abstract

The purpose of this review paper is to critically investigate the underlying factors that affect firm’s financial leverage from the perspective of theoretical underpinnings. We reviewed 107 papers published from 1991 to 2005 in the core, non-core and other academic journals. On the basis of critical review, this research has identified a number of determinants of financial leverage based upon logical arguments identified in the literatures. Major findings show that various frameworks like leverage irrelevance, static trade off, pecking order, asymmetric information signaling framework have partly helped us in understanding the underlying factors determining the firm’s financial leverage, there is no consensus and there is no universal factor determining financial leverage. The paper sets out two challenges for future research: one, how to integrate different factors determining firm’s financial leverage into a common framework and second, what are the explanatory factors determining firm’s financial leverage in a network phenomena.