Some Observations on Capital Structure and the Impact of Recent Recapitalizations on Share Prices

Robert H. Litzenberger

Journal of Financial and Quantitative Analysis, 1986, vol. 21, issue 1, 59-71

Abstract: This paper discusses two fundamental issues in capital structure theory and analyzes the recent recapitalizations of Phillips and Unocal. It is shown that a value-maximizing capital structure may be inconsistent with shareholder utility maximization and that the Miller debt and taxes equilibrium may be inconsistent with a complete capital market. In spite of these and other unresolved issues, the markets's reactions to the recent recapitalizations of Phillips and Unocal are consistent with the predictions of capital structure theory. Except for small redistribution effects against bondholders, the recapitalizations per se had no positive impact on common stock values.

Date: 1986
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