Capital StructureThe Miller and Modigliani theorem was first published in 1958 and was a revolutionary model in corporate finance. The M&M theorem of capital structure states that in an efficient market and in the absence of taxes, bankruptcy costs, and asymmetric information, the value of a firm is not affected by how it is funded. That is, how the company decides to raise capital, whether by taking on debt or using existing equity, does not affect the value of the company. Market Timing and Capital StructureThe article by Baker and Wurgler (2002) deals with the “market timing” of stocks. ”, that is, the practice of companies issuing shares when they are relatively expensive and repurchasing them when they are cheap. According to the MM model, the costs of different forms of capital do not vary independently because markets are efficient and integrated, but in practice firms use stock market timing. The analysis shows that stock market timing is on average effective and that companies tend to issue new shares when investors are overly enthusiastic about future earnings. Managers also admit that they use market timing. Baker and Wurgler's article addresses the problem of how market timing affects capital structure. Fluctuations in market value have very long-term impacts on capital structure. It is difficult to explain this result within the framework of traditional theories of capital structure, for example pecking order. The hierarchy should prevent managers from issuing new equity entirely. Zwiebel's (1996) managerial entrenchment theory of capital structure is partially consistent with market timing theory, but practice shows that managers exploit new investors rather than existing ones. Capital structure is the cumulative result of attempts to anticipate the stock market. Fluctuations in the market-to-book ratio have significant and lasting effects on leverage. The article shows that these results are more consistent with the theory of market timing. None of the theories of compromise, cherry-picking, and managerial entrenchment can explain the impact on capital structure. All of the previously mentioned theories have significant flaws. Market timing theory appears to be the best explanation of the empirical results in that capital structure is the cumulative result of attempts to time the market. It appears that other theories also have some explanatory power and, in some particular circumstances, might be more important than the market. timing theory to explain changes in capital structure. But the authors proved that if we had to choose just one theory, market timing theory would win because it has the greatest explanatory power. Capital Structure and Firm Performance Berger and Emilia (2003) used profit efficiency as a new approach to test corporate governance theory..