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Property Rights and Corporate Finance

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Author Info

  • Graff, Richard A.

    (Electrum Partners L.L.C.)

  • Kairys Jr., Joseph P.

    ()
    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

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    Abstract

    We examine a central result in corporate finance – the Modigliani-Miller capital structure irrelevance proposition – from a Coasian property rights perspective. Building upon the work of Coase, Demsetz and Cheung, we develop an enabling methodology to study the impact of positive Coasian transaction costs. When the Modigliani-Miller assumption of default-free debt is relaxed in the analysis of corporate leverage, either long-lived transaction costs related to property rights must be explicitly assumed away, or long-lived transaction costs related to property rights must be incorporated into the analysis.

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    File URL: http://hdl.handle.net/2077/2745
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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 174.

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    Length: 32 pages
    Date of creation: 23 Aug 2005
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0174

    Contact details of provider:
    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Keywords: property rights; transaction costs; capital structure;

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    1. Coase, R H, 1992. "The Institutional Structure of Production," American Economic Review, American Economic Association, vol. 82(4), pages 713-19, September.
    2. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    3. Stiglitz, Joseph E., 2001. "Information and the Change in the Paradigm in Economics," Nobel Prize in Economics documents 2001-8, Nobel Prize Committee.
    4. Frierman, Michael & Viswanath, P V, 1994. "Agency Problems of Debt, Convertible Securities, and Deviations from Absolute Priority in Bankruptcy," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 455-76, October.
    5. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
    6. Furubotn, Eirik G & Pejovich, Svetozar, 1972. "Property Rights and Economic Theory: A Survey of Recent Literature," Journal of Economic Literature, American Economic Association, vol. 10(4), pages 1137-62, December.
    7. Miller, Merton H, 1988. "The Modigliani-Miller Propositions after Thirty Years," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 99-120, Fall.
    8. Dahlman, Carl J, 1979. "The Problem of Externality," Journal of Law and Economics, University of Chicago Press, vol. 22(1), pages 141-62, April.
    9. Schwartz, Alan, 1993. "Bankruptcy Workouts and Debt Contracts," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 595-632, April.
    10. Hindley, Brian, 1970. "Separation of Ownership and Control in the Modern Corporation," Journal of Law and Economics, University of Chicago Press, vol. 13(1), pages 185-221, April.
    11. Modigliani, Franco, 1988. "MM--Past, Present, Future," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 149-58, Fall.
    12. Baird, Douglas G, 1993. "Revisiting Auctions in Chapter 11," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 633-53, April.
    13. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    14. Telser, Lester G, 1981. "Why There Are Organized Futures Markets," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 1-22, April.
    15. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
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    Cited by:
    1. Graff, Richard A. & Kairys, Jr. Joseph P., 2005. "Property Rights, Risk and Leverage," Working Papers in Economics 183, University of Gothenburg, Department of Economics.

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