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Jerold Warner (1977)
Bankruptcy, absolute priority, and the pricing of risky debt claimsJournal of Financial Economics, 4
Gould Gould (June, 1973)
“The Economics of Legal Conflicts,”Journal of Legal Studies, 2
A. Kraus, R. Litzenberger (1973)
A State-Preference Model of Optimal Financial LeverageJournal of Finance, 28
Merton Miller (1958)
The Cost of Capital, Corporation Finance and the Theory of InvestmentThe American Economic Review, 48
K. Arrow (1964)
The Role of Securities in the Optimal Allocation of Risk-bearingThe Review of Economic Studies, 31
James Scott (1976)
A Theory of Optimal Capital StructureThe Bell Journal of Economics, 7
Miller Miller, Modigliani Modigliani (June, 1963)
“Corporate Income Taxes and the Cost of Capital: A Correction,”American Economic Review, 53
J. Gould (1973)
The Economics of Legal ConflictsThe Journal of Legal Studies, 2
J. Hirshleifer (1965)
Investment Decision under Uncertainty: Choice—Theoretic ApproachesQuarterly Journal of Economics, 79
Nevins Baxter (1967)
LEVERAGE, RISK OF RUIN AND THE COST OF CAPITAL*Journal of Finance, 22
Jensen Jensen, Meckling Meckling (October, 1976)
“Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure,”Journal of Financial Economics, 3
F. Milne (1975)
Choice over asset economies: Default risk and corporate leverageJournal of Financial Economics, 2
J. Stiglitz (1967)
A Re-Examination of the Modigliani Miller TheoremThe American Economic Review, 59
Michael Jensen, W. Meckling (1976)
Theory of the Firm
M A Y 1n 9 SESSION TOPIC: CORPORATE FINANCE-EMPIRICAL SESSION CHAIRPERSON: MARTIN GRUBER* J. BANKRUPTCY COSTS: SOME EVIDENCE JEROLD WARNER** B. INTRODUCTION SUMMARY AND TESTS ASSUMPTIONS ABOUT THE magnitude of bankruptcy costs will have a considerable bearing on the issue of how much debt it is optimal for the firm to have in its capital structure. For example, in the original Modigliani-Miller model (1958), which abstracted from both corporate taxes and the possibility of bankruptcy, no debt/equity ratio could be regarded as optimal. Given perfect markets and rational investor behavior, they showed that the value of the firm would be invariant to its capital structure. Stiglitz (1969) has shown that the invariance result holds even when there is a positive probability of bankruptcy, but only as long as there are no transactions costs associated with bankruptcy.â Relaxing the assumption that bankruptcy is costless and introducing a corporate tax in which interest payments can be deducted from net income reopens the possibility of optimal debt/equity ratios. Kraus and Litzenberger (1973) have developed a formal model dealing with this case, and on a more general level a central theme in textbook discussion of capital structure policy has become the presumed
The Journal of Finance – Wiley
Published: May 1, 1977
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