Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs
AbstractThis paper considers the implications of bankruptcies, take-overs, and divergent expectations for the financial policy of the firm; we argue that, under reasonable assumptions, there is an optimal debt-equity ratio. Previous studies have shown that under very general conditions, if there is no chance of bankruptcy, then financial policy has no effect on the value of the firm; there is no optimal debt-equity ratio. Under certain very restrictive conditions, the no bankruptcy condition may be removed. We show that when these restrictive conditions are not satisfied, and when there is a real possibility of bankruptcy if the firm issues too much debt, the firm's valuation will depend on its debt-equity ratio; the real decisions of the firm (e.g., its investment and choice of technique) cannot be separated from its financial decisions; and the real decisions of the firm may not be productively efficient. Finally, the implications of the possibility of a take-over for the financial policy of the firm are considered.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by The RAND Corporation in its journal Bell Journal of Economics.
Volume (Year): 3 (1972)
Issue (Month): 2 (Autumn)
Contact details of provider:
Web page: http://www.rje.org
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2003.
"Bank Concentration and Crises,"
NBER Working Papers
9921, National Bureau of Economic Research, Inc.
- Demirguc-Kunt, Asli & Detragiache, Enrica, 1997. "The determinants of banking crises : evidence from industrial and developing countries," Policy Research Working Paper Series 1828, The World Bank.
- Chaney, Paul K. & Thakor, Anjan V., 1985.
"Incentive effects of benevolent intervention : The case of government loan guarantees,"
Journal of Public Economics,
Elsevier, vol. 26(2), pages 169-189, March.
- Paul K. Chaney & Anjan V. Thakor, 2004. "Incentive Effects of Benevolent Intervention - The case of government loan guarantees," Finance 0411047, EconWPA.
- Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2006.
"Bank concentration, competition, and crises: First results,"
Journal of Banking & Finance,
Elsevier, vol. 30(5), pages 1581-1603, May.
- Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2006. "Bank concentration, competition, and crises: First results," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125498, Tilburg University.
- Thorsten Beck, 2007.
"Bank Concentration and Fragility. Impact and Mechanics,"
in: The Risks of Financial Institutions, pages 193-234
National Bureau of Economic Research, Inc.
- Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2005. "Bank Concentration and Fragility: Impact and Mechanics," NBER Working Papers 11500, National Bureau of Economic Research, Inc.
- Asli Demirguc-Kunt & Enrica Detragiache, 2000.
"Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation,"
Econometric Society World Congress 2000 Contributed Papers
1751, Econometric Society.
- Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
- Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Does deposit insurance increase banking system stability ? An empirical investigation," Policy Research Working Paper Series 2247, The World Bank.
- repec:fip:fedhpr:y:2001:i:may:p:450-471 is not listed on IDEAS
- Joseph E. Stiglitz, 2011. "Rethinking Macroeconomics: What Failed, And How To Repair It," Journal of the European Economic Association, European Economic Association, vol. 9(4), pages 591-645, 08.
- Guy V.G. Stevens, 1993. "Internal funds and the investment function," International Finance Discussion Papers 450, Board of Governors of the Federal Reserve System (U.S.).
- Lächler, Ulrich, 1985. "Debt versus equity in development finance," Kiel Working Papers 248, Kiel Institute for the World Economy.
- Korinek, Anton & Stiglitz, Joseph E., 2009.
"Dividend taxation and intertemporal tax arbitrage,"
Journal of Public Economics,
Elsevier, vol. 93(1-2), pages 142-159, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.