Balance sheet of a company has two different sides: first, right side of balance sheet called as liabilities shows where money comes from; second, left side of balance sheet called as assets shows where money goes. Financial structure explains how firms’ operations that are acquiring assets, but whose yields are uncertain are financed. There are three sources of funding available to firms: those are retainedearnings, debt and equity. In academic, financial and business environments, the problems about how firms should finance their operations to avoid financial crises remain alive and acute.
Through debt financing, both financial and nonfinancial firms has certainly achieved too high growht rates. However, at the same time over borrowing process has increased the vulnerability and fragility of them against crises. Since recent global crisis, there has been a growing concern about the indebtedness of firms. Owing to excess indebtedness, a great number of major financial and nonfinancial firms have been insolvent inflicting severe damage on the global economy. Debt financing is neither stable and nor sustainable; therefore, global economic and financial system needs a more prudent way of financing that produces growth rate that is more stable and sustainable albeit anemic.
This paper surveys firms’fragilities in terms of their financial structures. It argues that unless a systemic credit crunch takes place, indebted firms can sustain their high growth rates and can make huge profits. However, in case of a systemic liquidity squeeze, insolvency is inevitable for them. According to this study, the more indebted the firms are, the more vulnerable and fragile they are. This paper suggests that like most of previous crises, borrowing is responsible for recent global crisis. This study shows that high growt rate based on debt is unrealistic and not sustainable. The higher indebted units are, the more vulnerabile and fragile they are when a systemic credit crunch occurs.
