Briefly explain what the empirical evidence suggests about financial managers' actions as they relate to the capital structure theory

What will be an ideal response?

Answer: Capital structure theory predicts that managers will add debt to the capital structure when current leverage is below the firm's optimal range of leverage use at the base of the overall cost of capital curve. Survey research indicates that in practice managers only go to the debt markets after after internal funds have been exhausted. This is surprising as the cost of internal equity is greater than that of the cost of debt. There are two reasons why this is happening. The most obvious reason for this behavior is that using internal funds minimizes the inconvenience to managers and constraints on their behavior that might come with issuing debt. The other possibility is that managers do not actually try to minimize the WACC.