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Capital Structure Equilibrium under Market Imperfections and Incompleteness
Author(s) -
SENBET LEMMA W.,
TAGGART ROBERT A.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb03862.x
Subject(s) - capital market line , economics , capital structure , capital market imperfections , microeconomics , intermediation , portfolio , financial intermediary , factor market , capital market , allocative efficiency , monetary economics , financial economics , stock market , financial system , finance , market depth , debt , context (archaeology) , paleontology , biology
This paper generalizes Miller's supply‐side equilibrium argument to other forms of capital market imperfections and incompleteness. If corporations possess a comparative advantage in dealing with these imperfections, they have an incentive to act as financial intermediaries. Corporations' attempts to profit from these intermediation activities dictate an optimal capital structure for the corporate sector as a whole, but in equilibrium the capital structure of any single firm is a matter of indifference. In addition, the positive role that corporate finance plays in completing the market restores standard perfect market results on asset pricing and the associated portfolio separation properties.