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Capital structure theory: Reconsidered

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  • Ardalan, Kavous

Abstract

In the mainstream of the academic field of finance, the Modigliani and Miller's (1958) proof of capital structure irrelevance theory, has been praised as the cornerstone of modern scientific finance. However, the capital structure irrelevance theory is based on a set of assumptions, which are both unrealistic and contradictory to the main assumption of the mainstream academic finance. This paper shows that by making more appropriate assumptions, capital structure becomes relevant. The paper, on a foundational ground, argues that since the results of sophisticated mathematical models change as soon as their underlying assumptions are changed, the claim about the scientific nature of the mainstream academic finance becomes questionable.

Suggested Citation

  • Ardalan, Kavous, 2017. "Capital structure theory: Reconsidered," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 696-710.
    • Handle: RePEc:eee:riibaf:v:39:y:2017:i:pb:p:696-710
    DOI: 10.1016/j.ribaf.2015.11.010
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    More about this item

    Keywords

    Capital structure; Firm value maximization; Share price maximization; Risky debt; Assumptions; Paradigms;
    All these keywords.

    JEL classification:

    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
    • B50 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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