Equilibrium Corporate Finance

Alberto Bisin (), Piero Gottardi () and Guido Ruta

No ECO2010/01, Economics Working Papers from European University Institute

Abstract: We study a general equilibrium model with production where financial markets are incomplete. At a competitive equilibrium firms take their production and financial decisions so as to maximize their value. We show that shareholders unanimously support value maximization. Furthermore, competitive equilibria are constrained Pareto efficient. Finally the Modigliani-Miller theorem typically does not hold and the firms’ corporate financing structure is determined at equilibrium. Such results extend to the case where informational asymmetries are present and contribute to determine the firms’ capital structure.

Keywords: capital structure; competitive equilibria; incomplete markets; asymmetric information (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cta
Date: 2010
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Working Paper: Equilibrium corporate finance (2009)
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