**2. Literature Review**

The first theories were formulated by Modigliani and Miller (1958), who wrote in an early article that the structure of capital does not influence the value of the firm. In their article MM started from the premises that the market is perfect and there are no factors that significantly influence the market, taxation does not exist, trading costs and bankruptcy are absent. In reality this theory is not valid because the perfect market does not exist and taxation is present. After the criticisms received regarding the first theory, a few years later, Modigliani and Miller (1963) considered the possibility of revising the first hypotheses, introducing taxation and developing the first theory. MM acknowledged that taxation has an effect on debt and capital and has some advantages since interest is deductible.

Agent theory developed by Jensen and Meckling (1976) captures the idea of agency costs that arise as a result of conflicts between managers, shareholders, and creditors. These conflicts are supposed to arise due to the inconsistency of interests. Managers tend to use the firm's resources in projects that bring more personal benefits than maximizing the value of the company. Shareholders can discourage such a behavior through monitoring and control activities. However, these actions also involve costs, called agency costs. Debt can reduce agency costs and affect the performance of the company at the same time, by determining the managers to act in the interest of the company rather than in their own interest. Thus, the option of a company to be financed through debt reduces the cash flow available at the discretion of managers, reducing agency costs.

Following the same line of thinking, the trade-off theory takes into account industry-level effects, taxes, bankruptcy costs and agency issues. Kraus and Litzenberger (1973) are the ones who grounded

this theory and argue that a firm can determine its financial structure by balancing the costs and benefits related to external financing. In this theoretical approach, the leverage is considered to bring advantages, under certain conditions, and managers prefer to use debt as a source of financing instead of the available internal funds. If a company becomes too indebted, the tax savings will be higher and therefore bankruptcy costs will rise. That is why it is recommended in theory to avoid over-indebtedness and to rationalize the indebtedness index. This theory starts from the premise that there is a positive relationship between the capital structure and the performance of the enterprise.

In contrast to previous theories, the pecking order theory developed by Myers and Majluf (1984) implies an ordering of financing sources, which presents greater flexibility and lower trading costs and is based on information asymmetry between companies and creditors. Due to the fact that the company has more information about the future than the creditors, the need for monitoring increases the borrowing costs, and this encourages companies to finance with their own funds, thus the first source would be internal financing. The second source is the external financing if it is required after the exhaustion of the internal funds, first resorting to the most secure sources, that is to say, the debt, then issues of securities. As soon as the internal funds become available, it is preferable to cancel the debt before maturity. The last source is the capital increase through the issue of shares. Therefore, the pecking order theory suggests that debt has an adverse effect on performance.

Unlike the pecking order theory, where firms use internal funds to eliminate the problems of adverse selection and loss of value, where they cannot show their quality using the financial structure, the signal theory, developed by Ross (1977), which uses the capital structure as a signal of private information, starts from the information asymmetry and underlines that the managers know the truth regarding the distribution of the company's results, but the creditors do not have this information. Investors see a high degree of debt as a signal of performance, because the company is considered to have the ability to repay the debt at maturity. Therefore, by contracting a loan, managers give a signal on the market to potential investors, as well as existing ones.

The market timing theory, developed by Baker and Wurgler (2002), starts from the idea that raising capital by issuing shares depends on market performance. In corporate finance, market timing involves in practice, issuing high-priced shares and repurchasing them at a lower price, in order to benefit from fluctuations in the ratio between the cost of equity and other forms of capital.

From most of the studies I have included in this paper, I have looked at the main indicators that have proved to be of undeniable importance and influence. Among them, indicators such as tangibility, profitability, liquidity and so on can be listed.
