Testing the Modigliani-Miller theorem directly in the lab: a general equilibrium approach
AbstractIn this paper, we directly test the Modigliani-Miller theorem in the lab. Applying a general equilibrium approach and not allowing for arbitrage among firms with different capital structures, we are able to address this issue without making any assumptions about individuals' risk attitudes and initial wealth positions. We find that, consistent with the Modigliani-Miller theorem, experimental subjects well recognized the increased systematic risk of equity with increasing leverage and accordingly demanded higher rate of return. Furthermore, the correlation between the value of the debt and equity is -0.94, which is surprisingly comparable with the -1 predicted by the Modigliani-Miller theorem. Yet, a U shape cost of capital seems to organize the data better.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2009-12.
Date of creation: May 2009
Date of revision:
Contact details of provider:
Postal: Universitätsstraße 15, A - 6020 Innsbruck
Web page: http://www.uibk.ac.at/fakultaeten/volkswirtschaft_und_statistik/index.html.en
More information through EDIRC
The Modigliani-Miller Theorem; Experimental Study; Decision Making under Uncertainty; General Equilibrium;
Other versions of this item:
- Prashanth Mahagaonkar & Jianying Qiu, 2008. "Testing the Modigliani-Miller theorem directly in the lab: a general equilibrium approach," Jena Economic Research Papers 2008-056, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- Jianying Qiu & Prashanth Mahagaonkar, 2009. "Testing the Modigliani-Miller theorem directly in the lab: a general equilibrium approach," Schumpeter Discussion Papers sdp09006, Universitätsbibliothek Wuppertal, University Library.
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Janette Walde).
If references are entirely missing, you can add them using this form.