For more than four decades discussion. in corporate finance concerns the, question of optimal capital, structure: Given a level of total capital necessary for supporting company's activities, is there a way of dividing this capital into debt and equity which maximizes firm value? And, if so, what are the. critical factors in setting the leverage ratio for a given company? Under the assumption of a capital market in which corporate taxation is the single market imperfection Modigliani and Miller show that firms prefer debt, financing if interest costs are tax-deductible. Others claim that the actual impact of the deductibility depends on the existence. of a crowding-out effect by non-debt tax shield. After. Modigliani and Miller a line of research emerged in which direct and indirect bankruptcy costs and their influence on the level of leverage were introduced. Theoretical arguments also suggest that the debt-equity ratio is related to agency costs. A vast and rapidly growing literature deals with potential relations between this choice and agency problems. Three well-known predictions prevail. First, leverage aggravates agency conflicts between shareholders and bondholders. Frequently cited examples are the direct wealth transfer problem, the asset substitution problem and the under-investment problem. Second, leverage mitigates agency problems that arise from managerial behavior that conflicts with the interest of shareholders. Well-known example is the overinvestinent problem. Finally, the relative amount of debt raises the costs of agency problems with stake-holders like Customers and employees. In this paper we test agency theories within a framework of capital Structure decisions. Data and the empirical method allow (1) to distinguish between tax and bankruptcy determinants of leverage and agency determinants and (2) to distinguish between determinants of leverage and determinants of agency problems. For analysis we use questionnaire data of non-financial firms in Slovakia. By means of a questionnaire we asked financial managers (CFOs) for their opinion about firm characteristics. The knowledge of these managers goes beyond publicly available data and includes internal information, Such as the presence of agency problems. The analysis itself Uses Structural equations modeling with confirmatory analysis. The structural equations model describes the relationships between the variables in the model. Five endogenous variables are leverage and the presence of four agency problems. Each of these five endogenous variables is potentially determined by a wide set of exogenous variables. The main result of the research is that direct relations between leverage and agency problems seem to be absent. This does not imply that the agency problems are irrelevant. Other instruments than leverage affect agency problems. As expected, a positive relation between some exogenous variables and agency problems determinants has been found. The final part explains important reasons for described state. As the conclusion, some recommendations for CFOs in Setting up the capital Structure are mentioned. Particularly, in developing a sensible approach to capital Structure strategy, the CFOs Should start by thinking about firm's target capital Structure, that is a ratio of debt to total capital that can be expected to minimize taxes and contracting, Costs. In sum, to make a sensible decision about capital Structure, CFOs must understand both the costs associated with deviating from the target capital Structure and the costs of adjusting back toward the target. The next step forward in solving the capital Structure problem is to involve a more formal weighing of these two sets of costs.
