Corporate capital structure revisited: incomplete markets and default
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2007-04-11
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Braido, Luís Henrique Bertolino
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After Modigliani and Miller (1958) presented their capital structure irrelevance proposition, analysis of corporate financing choices involving debt and equity instruments have generally followed two trends in the literature, where models either incorporate informational asymmetries or introduce tax benefits in order to explain optimal capital structure determination (Myers, 2002). None of these features is present in this paper, which develops an asset pricing model with the purpose of providing a positive theory of corporate capital structure by replicating main aspects of standard contractual practice observed in real markets. Alternatively, the imperfect market structure of the economy is tailored to match what is most common in corporate reality. Allowance for default on corporate debt with an associated penalty of seizure of firm's future cash flows by creditors is introduced, for instance. In this context, a qualitative assessment of financial managers' decisions is carried out through numerical procedures.