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Risk of Bankruptcy and the Modigliani-Miller theorem in a General Equilibrium model of Socially Responsible Investing

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  • Fabian Alex

Abstract

In the SRI-augmented version of the Arrow-Debreu-model by Arnold (2023), the restriction to no risk of bankruptcy is immaterial. Furthermore, shareholder unanimity is still valid when a firm’s bond issuance (viz., its leverage) is chosen endogenously. The debt-equity-ratio of firms may not only be set arbitrarily (independent of their capital choice) with respect to shareholder value, but also to entire budget sets, implying an economy-wide Modigliani-Miller type of irrelevance given market completeness. If SRI leads individuals to constrain the set of assets they are prepared to buy and, thus, reduces their personal marketed subspace, over-indebtedness may restore it.

Suggested Citation

  • Fabian Alex, 2025. "Risk of Bankruptcy and the Modigliani-Miller theorem in a General Equilibrium model of Socially Responsible Investing," Working Papers 241, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:241_alex.rdf
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    References listed on IDEAS

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    1. Christian Gollier & Sébastien Pouget, 2022. "Investment Strategies and Corporate Behaviour with Socially Responsible Investors: A Theory of Active Ownership," Economica, London School of Economics and Political Science, vol. 89(356), pages 997-1023, October.
    2. Arnold, Lutz G., 2023. "On the neutrality of socially responsible investing," Theoretical Economics, Econometric Society, vol. 18(1), January.
    3. Stiglitz, Joseph E, 1969. "A Re-Examination of the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 59(5), pages 784-793, December.
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    Keywords

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    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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