Capital structure theories aim to explain how a firm's value is affected by its use of debt versus equity financing. The major theories are the traditional view that firm value decreases with more debt due to higher bankruptcy costs, and the trade-off theory that argues moderate use of debt can increase firm value up to an optimal point where higher interest tax shields are offset by increasing bankruptcy costs. Modigliani and Miller's seminal work established that under certain assumptions firm value is unaffected by its capital structure in perfect markets.