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http://hdl.handle.net/10419/25738
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| Title: | | Testing the Modigliani-Miller theorem directly in the lab: a general equilibrium approach  |
| Authors: | | Mahagaonkar, Prashanth Qiu, Jianying |
| Issue Date: | | 2008 |
| Series/Report no.: | | Jena economic research papers 2008,056 |
| Abstract: | | In this paper, we experimentally test the Modigliani-Miller theorem. Applying a general equilibrium approach and not allowing for arbitrage among firms with different capital structure, we are able to address a question fundamental to the valuation of firms: does capital structure affect the value of the firm? If so, how? We find that, consistent with the Modigliani-Miller theorem, experimental subjects well recognized the increased systematic risk of the equity with increasing leverage and accordingly demanded higher rate of return. Yet, this adjustment was not perfect: subjects underestimated the systematic risk of low leveraged equity whereas overestimated the systematic risk of high leveraged equity, resulting in a U shape weighted average cost of capital |
| Subjects: | | The Modigliani-Miller Theorem experimental study decision making under uncertainty general equilibrium |
| JEL: | | G32 C91 G12 D53 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Jena Economic Research Papers, MPI für Ökonomik
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