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Equilibrium Corporate Finance

  • Alberto Bisin
  • Piero Gottardi
  • Guido Ruta

We study a general equilibrium model with production where financial markets are incomplete. At a competitive equilibrium firms take their production and financial decisions so as to maximize their value. We show that shareholders unanimously support value maximization. Furthermore, competitive equilibria are constrained Pareto efficient. Finally the Modigliani-Miller theorem typically does not hold and the firms’ corporate financing structure is determined at equilibrium. Such results extend to the case where informational asymmetries are present and contribute to determine the firms’ capital structure.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2010/01.

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Date of creation: 2010
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Handle: RePEc:eui:euiwps:eco2010/01
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