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Capital Structure and Dividend Irrelevance with Asymmetric Information

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Author Info
Dybvig, Philip H
Zender, Jaime F

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Abstract

The Modigliani and Miller propositions on the irrelevancy of capital structure and dividends are shown to be valid in a large class of models with asymmetric information. The main assumption is that managerial compensation is chosen optimally. This differs from most of the recent articles on this topic, which impose by fiat a suboptimal contract. Even when imperfections internal to the firm preclude optimal investment, there is a separation between incentives and financing. We conclude that corporations should move toward contracts with better incentives, and that new models should be built that recognize the limitations to optimal contracting. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 4 (1991)
Issue (Month): 1 ()
Pages: 201-19
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Handle: RePEc:oup:rfinst:v:4:y:1991:i:1:p:201-19

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Philip H. Dybvig, 1987. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Cowles Foundation Discussion Papers 826R, Cowles Foundation, Yale University, revised Jan 1988. [Downloadable!]
    Other versions:
  2. Eckbo, B. Espen, 1986. "Valuation effects of corporate debt offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 119-151. [Downloadable!] (restricted)
  3. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September. [Downloadable!] (restricted)
  4. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," Journal of Business, University of Chicago Press, vol. 51(3), pages 453-75, July. [Downloadable!] (restricted)
  5. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May. [Downloadable!] (restricted)
    Other versions:
  6. Krasker, William S, 1986. " Stock Price Movements in Response to Stock Issues under Asymmetric Information," Journal of Finance, American Finance Association, vol. 41(1), pages 93-105, March. [Downloadable!] (restricted)
  7. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael J. Brennan & Anjan V. Thakor, 2004. "Shareholder Preferences and Dividend Policy," Finance 0411017, EconWPA. [Downloadable!]
    Other versions:
  2. Kooyul Jung & Yong-Cheol Kim & Rene M. Stulz, 1994. "Investment Opportunities, Managerial Decisions, and the Security Issue Decision," NBER Working Papers 4907, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Eckbo, B. Espen & Norli, Øyvind, 2004. "The choice of seasoned-equity selling mechanism: Theory and evidence," Discussion Papers 2004/17, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
    Other versions:
  4. N. K. Chidambaran & John Kose, 1998. "Relationship Investing: Large Shareholder Monitoring with Managerial Cooperation," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-044, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  5. Michael Brennan & Ian Dunlop, 1991. "Contributing Shares," University of California at Los Angeles, Anderson Graduate School of Management 1171, Anderson Graduate School of Management, UCLA. [Downloadable!]
  6. Andres Almazan & Javier Suarez & Sheridan Titman, 2003. "Stakeholder, Transparency and Capital Structure," NBER Working Papers 10101, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Batabyal, Amitrajeet A., 1995. "An Agenda For The Study Of Land Use, Wilderness Designation, And Resource Regulation In The American West," Economics Research Institute, ERI Study Papers 28360, Utah State University, Economics Department. [Downloadable!]
    Other versions:
  8. Oliver Hart, 2001. "Financial Contracting," NBER Working Papers 8285, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. John C. Persons, . "Fully Revealing Equilibria with Suboptimal Investment," Research in Financial Economics 9507, Ohio State University. [Downloadable!]
  10. Zingales, Luigi, 2000. "In Search of New Foundations," CEPR Discussion Papers 2551, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Robert M. Gillenkirch & Markus C. Arnold, 2002. "Stock Options as Incentive Contract and Dividend Policy," Working Paper Series: Finance and Accounting 89, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  12. Zsuzsanna Fluck, 1999. "Capital Structure Decisions in Small and Large Firms: A Life-cycle Theory of Financing," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-069, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  13. Luigi Zingales, 2000. "In Search of New Foundations," NBER Working Papers 7706, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Siew Teoh & Chuan Hwang, 1990. "Non-disclosure and Adverse Disclosure as Signals of Firm Value," University of California at Los Angeles, Anderson Graduate School of Management 1182, Anderson Graduate School of Management, UCLA. [Downloadable!]
    Other versions:
  15. Oliver Hart, 2001. "Financial Contracting," Harvard Institute of Economic Research Working Papers 1924, Harvard - Institute of Economic Research. [Downloadable!]
  16. Jun-Koo Kang & Rene M. Stulz, 1994. "How Different is Japanese Corporate Finance? An Investigation of the Information Content of New Security Issues," NBER Working Papers 4908, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Lusine LUSINYAN, 2002. "International Capital Flows, Economic Growth and Financial Market Efficiency," Economics Working Papers ECO2002/20, European University Institute. [Downloadable!]
  18. Michael C. Keeley, 1989. "The stock price effects of bank holding company securities issuance," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 3-19. [Downloadable!]
  19. Luigi Zingales, 2000. "In Search of New Foundations," CRSP working papers 515, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
  20. Sundaram, Rangarajan K. & Yermack, David, 2006. "Pay Me Later: Inside Debt and Its Role in Managerial Compensation," SIFR Research Report Series 43, Institute for Financial Research. [Downloadable!]
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