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Capital Structure Equilibrium under Incomplete Market Conditions

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Listed author(s):
  • Lemma W. Senbet
  • Robert A. Taggart, Jr.
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    Abstract

    Most discussions of corporate capital structure have been set in the context of a complete capital market. In this paper we study the determinants of capital structure for the incomplete markets case, where incompleteness manifests itself in the form of divergent borrowing and lending rates. We argue that firms have a natural incentive to tailor their financing choices so as to narrow such divergences. While this implies an optimal capital structure for firms in the aggregate, however, competition will drive out profits, and the capital structure of any individual firm may still be a matter of indifference. Firms' incentive to try to complete the market provides a rationale for corporate finance even in a taxless environment. This incentive may also shed light on such related issues as corporate mergers, the use of complex securities and the role of financial intermediaries.

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    File URL: http://www.nber.org/papers/w0747.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0747.

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    Date of creation: Sep 1981
    Publication status: published as Senbet, Lemma W. and Robert A. Taggart, Jr. "Capital Structure Equilibriumunder Market Imperfections and Incompleteness." Journal of Finance, Vol. 3 9, No. 1, (March 1984), pp. 93-103.
    Handle: RePEc:nbr:nberwo:0747
    Note: ME
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    Cited by:

    1. Robert A. Taggart, Jr., 1981. "Secular Patterns in Corporate Finance," NBER Working Papers 0810, National Bureau of Economic Research, Inc.

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