Final answer:
The trade-off theory fails to account for why some thriving companies maintain low debt levels, overlooking factors such as internal cash flow, control, and agility, as well as unmeasured benefits of knowledge and skills transfer in international trade.
Step-by-step explanation:
The trade-off theory struggles to explain why some of the most successful companies thrive with low debt levels. This economic principle suggests that there should be a balanced mix of both debt and equity financing to optimize a company's value, with the implication that a certain level of debt is beneficial through tax shields and other factors. However, successful companies may rely on low debt levels due to their ability to generate high amounts of internal cash flow, which reduces the necessity to seek external financing through debt.
Furthermore, firms may prioritize control and financial flexibility over the potential tax benefits of higher debt. The presence of market competition may also induce companies to minimize debt to remain agile and not be overburdened with financial obligations that could impair competitiveness and response to market fluctuations. Lastly, the transfer of knowledge and skills among countries and firms, as observed in international trade and the splitting up of the production value chain, often have unmeasured benefits that are not encapsulated within the trade-off theory's purview.