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Relevance or irrelevance of capital structure?

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  • Ibrahimo, M.V.
  • Barros, C.P.

Abstract

In this paper we examine the effects of asymmetric information on the nature of financial equilibrium and on the capital structure of firms. In the first model presented, the financial contracts on offer involve pooling equilibrium with no adverse selection. However, in the special case analyzed, where contracts are of mixed form, there may be a separating equilibrium and also equilibrium may not exist. Interesting result is that the separating equilibrium found is not economically efficient since aggregate investments falls short of first-best level. More importantly, capital structure does matter. The relative magnitude of outside equity makes a real difference to the quantity of aggregate investment in equilibrium.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 2 (March)
Pages: 473-479

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:2:p:473-479

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Asymmetric information Capital structure of firms Model;

References

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Cited by:
  1. repec:ise:isegwp:wp432009 is not listed on IDEAS
  2. Assaf, A. George & Barros, Carlos Pestana & Managi, Shunsuke, 2011. "Cost efficiency of Japanese steam power generation companies: A Bayesian comparison of random and fixed frontier models," Applied Energy, Elsevier, vol. 88(4), pages 1441-1446, April.
  3. repec:ise:isegwp:wp52010 is not listed on IDEAS
  4. Matos, Pedro Verga & Faustino, Horácio C., 2012. "Beta-convergence and sigma-convergence in corporate governance in Europe," Economic Modelling, Elsevier, vol. 29(6), pages 2198-2204.

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