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Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs: Comment

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  • Richard C. Stapleton

Abstract

In a recent paper in this Journal, Stiglitz purports to show that leverage may affect the value of the firm in competitive capital markets if the possibility of bankruptcy and the differential expectations between stock holders and bond holders are admitted. However, Stiglitz argues that leverage may reduce the value of the firm, and this note shows, for Stiglitz' special case and in general, that leverage cannot reduce the value of the firm. The Modigliani-Miller arbitrage argument holds, since investors can always undo the leverage of the firm, even when markets are not complete. Whether leverage can increase the value of the firm under incomplete markets is still an open issue.

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  • Richard C. Stapleton, 1975. "Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs: Comment," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 708-710, Autumn.
    • Handle: RePEc:rje:bellje:v:6:y:1975:i:autumn:p:708-710
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    Cited by:

    1. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.

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