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Capital Structure Theory and the Fisher Effect
Author(s) -
Kelly William A.,
Miles James A.
Publication year - 1989
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1989.tb00330.x
Subject(s) - miller , economics , capital structure , econometrics , inflation (cosmology) , mathematical economics , physics , macroeconomics , theoretical physics , debt , ecology , biology
This paper incorporates capital structure theory to model the response of nominal interest rates to expected inflation in a world with taxes. Within an otherwise common framework, the model includes Modigliani‐Miller (MM) and Miller capital structure theory, as well as a variation of the Miller model with bankruptcy costs, developed by DeAngelo and Masulis. Within this framework, we derive an equation to predict the response of nominal interest rates under each capital structure hypothesis. With MM theory, our model predicts di D / d π value consistent with empirically observed ranges. With Miller theory, the predictions are inaccurate. With DeAngelo‐Masulis, the predictions vary widely; the midpoint of the predicted range is less accurate than with Miller theory.