IDEAS home Printed from https://ideas.repec.org/p/cwl/cwldpp/878.html
   My bibliography  Save this paper

Capital Structure and dividend Irrelevance with Asymmetric Information

Author

Listed:
  • Philip H. Dybvig
  • Jaime F. Zender

Abstract

The Modigliani and Miller propositions on the irrelevancy of capital structure and dividends are shown to be valid in a large class of models with asymmetric information. The main assumption is that managerial compensation is chosen optimally. This differs from most recent papers on this topic, which impose by fiat a suboptimal contract. Even when imperfections internal to the firm preclude optimal investment, there is a separation between incentives and financing. We also show that making prices reflect idiosyncratic information more accurately does not make investors better off, thus negating the motivation of many of the signalling models.

Suggested Citation

  • Philip H. Dybvig & Jaime F. Zender, 1988. "Capital Structure and dividend Irrelevance with Asymmetric Information," Cowles Foundation Discussion Papers 878, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:878
    as

    Download full text from publisher

    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d08/d0878.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Krasker, William S, 1986. "Stock Price Movements in Response to Stock Issues under Asymmetric Information," Journal of Finance, American Finance Association, vol. 41(1), pages 93-105, March.
    3. Eckbo, B. Espen, 1986. "Valuation effects of corporate debt offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 119-151.
    4. Philip H. Dybvig, 1988. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 67-88.
    5. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    6. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
    7. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    8. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, vol. 51(3), pages 453-475, July.
    9. Dann, Larry Y. & Mikkelson, Wayne H., 1984. "Convertible debt issuance, capital structure change and financing-related information : Some new evidence," Journal of Financial Economics, Elsevier, vol. 13(2), pages 157-186, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. de Jong, Abe & Veld, Chris, 2001. "An empirical analysis of incremental capital structure decisions under managerial entrenchment," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1857-1895, October.
    2. Krishnaswami, Sudha & Yaman, Devrim, 2007. "Contracting costs and the window of opportunity for straight debt issues," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 869-888, March.
    3. Katherine L. Phelps & William T. Moore & Rodney L. Roenfeldt, 1991. "Equity Valuation Effects Of Warrant-Debt Financing," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 14(2), pages 93-103, June.
    4. Bruno Biais & Thomas Mariotti, 2005. "Strategic Liquidity Supply and Security Design," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 615-649.
    5. Luc Renneboog & Peter G. Szilagyi, 2008. "Corporate Restructuring and Bondholder Wealth," European Financial Management, European Financial Management Association, vol. 14(4), pages 792-819, September.
    6. Abhyankar, Abhay & Dunning, Alison, 1999. "Wealth effects of convertible bond and convertible preference share issues: An empirical analysis of the UK market," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1043-1065, July.
    7. Yushu Zhu, 2017. "Call it good, bad or no news? The valuation effect of debt issues," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1203-1229, December.
    8. Paul-Olivier KLEIN, 2017. "Do Shareholders Value Bond Offerings? A Meta-Analysis," Working Papers of LaRGE Research Center 2017-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    9. Dutordoir, Marie & Li, Hui & Liu, Frank Hong & Verwijmeren, Patrick, 2016. "Convertible bond announcement effects: Why is Japan different?," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 76-92.
    10. Suchard, Jo-Ann, 2007. "The impact of rights issues of convertible debt in Australian markets," Journal of Multinational Financial Management, Elsevier, vol. 17(3), pages 187-202, July.
    11. Linn, Scott C. & Stock, Duane R., 2005. "The impact of junior debt issuance on senior unsecured debt's risk premiums," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1585-1609, June.
    12. Yongsik Kim, 2020. "Announcement Effects of Convertible and Warrant Bond Issues with Embedded Refixing Option: Evidence from Korea," Sustainability, MDPI, Open Access Journal, vol. 12(21), pages 1-21, October.
    13. Ajay Patel & Douglas R. Emery & Yul W. Lee, 1993. "Firm Performance And Security Type In Seasoned Offerings: An Empirical Examination Of Alternative Signaling Models," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(3), pages 181-192, September.
    14. Ghadeer Khartabiel & Ahmad Abu-Alkheil & Tunku Salha Tunku Ahmad & Walayet Khan, 2020. "Shari’ah-compliant Sukuk versus conventional bond announcements: is there a wealth effect?," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 1059-1073, April.
    15. Loncarski, I. & Ter Horst, J.R. & Veld, C.H., 2006. "Why do Companies issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market," Discussion Paper 2006-65, Tilburg University, Center for Economic Research.
    16. Kelvin Jui Keng Tan & Jia Min Lee & Robert W. Faff & Kathy Walsh, 2016. "Short-selling pressure and last-resort debt finance: evidence from 144A high-yield risk-adjusted debt," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(4), pages 1149-1185, December.
    17. J. Eric Bickel, 2006. "Some Determinants of Corporate Risk Aversion," Decision Analysis, INFORMS, vol. 3(4), pages 233-251, December.
    18. Ammann, Manuel & Fehr, Martin & Seiz, Ralf, 2006. "New evidence on the announcement effect of convertible and exchangeable bonds," Journal of Multinational Financial Management, Elsevier, vol. 16(1), pages 43-63, February.
    19. Duca, Eric & Dutordoir, Marie & Veld, Chris & Verwijmeren, Patrick, 2012. "Why are convertible bond announcements associated with increasingly negative issuer stock returns? An arbitrage-based explanation," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2884-2899.
    20. Jorge Vieira da Costa Jr & Alfredo Sarlo Neto & Andrea Bispo da Silva, 2016. "Balance sheet classification of compound financial instruments and the judgment of securities market analysts," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(5), pages 37-54, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:878. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Matthew Regan (email available below). General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.