MAY 1977 SESSION TOPIC: CORPORATE FINANCE AND THE CAPITAL ASSET PRICING MODEL SESSION CHAIRPERSON: MICHAEL BRENNAN* MARKET IMPERFECTIONS, CAPITAL MARKET EQUILIBRIUM AND CORPORATION FINANCE AND R. C. STAPLETON M. G. SUBRAHMANYAM** THISPAPER IS CONCERNED WITH TWO TYPES Of market Segmentation and their implications for corporate financial decisions. The first type is caused by restrictions on certain individuals investing in certain securities and is exemplified by segmentation in international capital markets. The second type is induced by the simultaneous existance of differential personal tax rates and a fixed element of transactions costs. Segmentation of the former type produces incentives for firms to merge and affects the cost of capital, while the latter type raises questions about the tax effect of dividend policy. The framework of the analysis is the single period capital asset pricing model (CAPM). The derivation of equilibrium security prices given these market imperfections and the comparative statics of the corporate policy changes is analytically intractable. For example, if fixed transactions costs exist investors face complicated maximization problems for which no neat analytical results are possible. However, numerical solutions for equilibrium can be obtained by modelling the tztonnement process towards equilibrium. A Walrasian auctioneer presents a set
The Journal of Finance – Wiley
Published: May 1, 1977
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