Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/195676
Authors: 
Kopecky, Kenneth J.
Li, Zhichuan
Sugrue, Timothy F.
Tucker, Alan L.
Year of Publication: 
2018
Citation: 
[Journal:] International Journal of Financial Studies [ISSN:] 2227-7072 [Volume:] 6 [Year:] 2018 [Issue:] 1 [Pages:] 1-12
Abstract: 
Modigliani and Miller present an equity-quantity shifting equilibrating process to achieve an optimal firm value in the presence of corporate taxes. However, in the era in which they derived their various propositions regarding the relation between a firm's value and its capital structure, well-capitalized takeover specialists including private equity firms and sovereign funds did not exist, at least by today's standards. In this paper we develop a simple arbitrage strategy, made viable by the presence of takeover firms, which presents an alternative equilibrating process to achieve the same optimal firm value. This alternative process is markedly different from that of the Modigliani and Miller theorem in terms of its predictions for debt use and restores the prospect of capital structure irrelevancy despite the existence of corporate taxes.
Subjects: 
capital structure
debt
interest deduction
equity price adjustment
JEL: 
G30
G32
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by/4.0/
Document Type: 
Article
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