In his 1990 Nobel Prize address, the "father of modern finance" begins by discussing the benefits of debt financing and hen goes on to discuss potential costs. Although certainly capable of excesses, private capital markets have self-correcting mechanisms that limit corporate "overleveraging." Contrary to popular perception, corporate leveraging does not increase risk for the economy as a whole, and the financial difficulties of highly leveraged companies involve "mainly private, not social costs." (And provided the Chapter 11 process doesn't get in the way, debt often plays the socially constructive role of eliminating excess capacity.) Finally, regulations designed to reinforce capital markets' built-in controls against overleveraging are generally not only unnecessary but positively harmful to the economy. (c) The Nobel Foundation 1990.
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Volume (Year): 17 (2005)
Issue (Month): 1 ()
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- Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.