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A Theory of Optimal Capital Structure

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  • James H. Scott Jr.
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    Abstract

    This paper presents a multiperiod model of firm valuation derived under the assumptions that bankruptcy is possible and that secondary markets for assets are imperfect. Given the assumption that the probability of bankruptcy is zero, the model is formally identical to that proposed by Modigliani and Miller. Under plausible conditions the model implies a unique optimal capital structure. Comparative statics analysis is used to obtain a number of testable hypotheses which specify the parameters on which optimal financial policy depends. Implications for the debt policy of the regulated firm are also considered.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 7 (1976)
    Issue (Month): 1 (Spring)
    Pages: 33-54

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    Handle: RePEc:rje:bellje:v:7:y:1976:i:spring:p:33-54

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    Cited by:
    1. J. Gregory Ballentine & Charles E. McLure, Jr., 1980. "Taxation and Corporate Financial Policy," NBER Working Papers 0243, National Bureau of Economic Research, Inc.
    2. Strelnik, Mikhail, 2014. "Approving the ISDWIR Method of Risk Measurement in Making Risk Management Decision || Aprobación del método de medición del riesgo SIIPDR en el manejo de asunción de riesgos," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 17(1), pages 42-59, June.
    3. John Graham & Mark T. Leary & Michael R. Roberts, 2014. "A Century of Capital Structure: The Leveraging of Corporate America," NBER Working Papers 19910, National Bureau of Economic Research, Inc.
    4. Kane, Alex & Marcus, Alan J. & McDonald, Robert L., 1985. "Debt Policy and the Rate of Return Premium to Leverage," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 479-499, December.
    5. Florian Heider & Alexander Ljungqvist, 2012. "As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes," NBER Working Papers 18263, National Bureau of Economic Research, Inc.
    6. David Amdur, 2008. "Capital Structure Over The Business Cycle," Working Papers gueconwpa~08-08-03, Georgetown University, Department of Economics.
    7. Aktham Maghyereh, 2005. "Dynamic Capital Structure: Evidence From The Small Developing Country Of Jordan," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 13(1), pages 1-32, June.
    8. Schober, Dominik & Schäffler, Stephan & Weber, Christoph, 2014. "Idiosyncratic risk and the cost of capital: The case of electricity networks," ZEW Discussion Papers 14-010, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Udo Broll & Kit Wong, 2013. "The firm under uncertainty: real and financial decisions," Decisions in Economics and Finance, Springer, vol. 36(2), pages 125-136, November.
    10. Mahmoud Moeinaddin & Shahnaz Nayebzadeh & Masoumeh Ghasemi, 2013. "The Relationship between Product Market Competition and Capital Structure of the Selected Industries of the Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(3), pages 221-233, July.

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