Capital Structure and dividend Irrelevance with Asymmetric Information
AbstractThe 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 recent papers 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 also show that making prices reflect idiosyncratic information more accurately does not make investors better off, thus negating the motivation of many of the signalling models.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 878.
Length: 37 pages
Date of creation: Jul 1988
Date of revision:
Publication status: Published in Review of Financial Studies (1991), 4: 201-219
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- Dybvig, Philip H & Zender, Jaime F, 1991. "Capital Structure and Dividend Irrelevance with Asymmetric Information," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 201-19.
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- Philip H. Dybvig, 1988. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 67-88.
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