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The Changing Nature of Debt and Equity: A Financial Perspective


  • Franklin Allen


As a result of the historical importance of debt and equity, the traditional focus of inquiry into firms’ choice of capital structure has been "What is the optimal debt/equity ratio?" This approach lead to the Modigliani and Miller theorems and a large body of subsequent work but has not been very successful in explaining firms’ actual choices of debt and equity. The notion that firms finance their activities with debt and equity is a simplification; corporations have issued securities other than standard debt and equity for many centuries. This fact and the rapid pace of financial innovation in recent years suggests that a more fundamental issue than "What is the optimal debt/equity ratio?" is "What are the optimal securities that should be issued?" This paper surveys recent studies of capital structure that have looked at this question.

Suggested Citation

  • Franklin Allen, "undated". "The Changing Nature of Debt and Equity: A Financial Perspective," Rodney L. White Center for Financial Research Working Papers 35-89, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:35-89

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    References listed on IDEAS

    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Sundaresan, Suresh M, 1989. "Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 73-89.
    3. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    4. James M. Nason, 1988. "The equity premium and time-varying risk behavior," Finance and Economics Discussion Series 11, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Bohn, Henning, 1995. "Towards a theory of incomplete financial markets A review essay," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 433-449, November.
    2. Houston, Joel F. & Venkataraman, S., 1996. "Liquidation under moral hazard: Optimal debt maturity and loan commitments," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 115-133, January.

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