The Importance of Capital Structure

Michael Milken has a good editorial in today's WSJ regarding a firms capital structure.  Modern finance theory holds that capital structure does not matter (which some assumptions, of course).  Milken argues that this credit cycle, like previous credit cycles (most recently the one of 1974), show us the importance of credit structures. Milken says:

The late Nobel laureate Merton Miller and I, although good friends, long debated whether this kind of capital-structure management is an essential job of corporate leaders. Miller believed that capital structure was not important in valuing a company's securities or the risk of investing in them.

My belief -- first stated 40 years ago in a graduate thesis and later confirmed by experience -- is that capital structure significantly affects both value and risk. The optimal capital structure evolves constantly, and successful corporate leaders must constantly consider six factors -- the company and its management, industry dynamics, the state of capital markets, the economy, government regulation and social trends. When these six factors indicate rising business risk, even a dollar of debt may be too much for some companies.