An Analysis Of The Conditions For The Validity Of Modigliani-Miller Theorem With Incomplete Markets
AbstractIn this paper we investigate the consequences of the firms' financial decisions in the framework of a perfectly competitive general equilibrium model with incomplete markets. When markets are complete or there are no derivative securities (such as options, forwards or futures) written on the firms' shares, these decisions are irrelevant. This result reaffirms and qualifies the original claim by Modigliani and Miller. On the other hand, if markets are incomplete, we show that in the presence of any type of derivative security a change in the capital structure of a firm will modify, generically, both the real equilibrium allocation and the value of the firm. The reason is that the payoff of the derivative securities is affected in a non-linear way by changes in the firm's financial policy; thus the set of the agents' insurance opportunities is also modified.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Cambridge - Risk, Information & Quantity Signals in its series Papers with number 157.
Length: 43 pages
Date of creation: 1990
Date of revision:
Contact details of provider:
Postal: UNIVERSITY OF CAMBRIDGE, RESEARCH PROJECT ON RISK, INFORMATION AND QUANTITY SIGNALS IN ECONOMICS(E.S.R.C.), DEPARTMENT OF APPLIED ECONOMICS, SIDGWICK AV. CAMBRIDGE CB3 9DEDE U.K..
Web page: http://www.econ.cam.ac.uk/
More information through EDIRC
decision making ; enterprises ; economic equilibrium;
Other versions of this item:
- Gottardi, Piero, 1995. "An Analysis of the Conditions for the Validity of Modigliani-Miller Theorem with Incomplete Markets," Economic Theory, Springer, vol. 5(2), pages 191-207, March.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Dahai Yu, 1998. "Two equivalence theorems for government finance," International Finance Discussion Papers 622, Board of Governors of the Federal Reserve System (U.S.).
- Yann Algan & Olivier Allais & Eva Carceles-Poveda, 2009.
"Macroeconomic Effects of Financial Policy,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 678-696, October.
- Yann Algan & Olivier Allais & Eva Carceles-Poveda, 2009. "Code files for "Macroeconomic Effects of Financial Policy"," Computer Codes 06-51, Review of Economic Dynamics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.