Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information

Arturo Macias ()
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Arturo Macias: Universidad Nacional de Educacion a Distancia (UNED) and Banco de España

Experimental Economics, 2022, vol. 25, issue 5, No 6, 1418-1440

Abstract: Abstract This article presents a laboratory experiment about capital structure irrelevance. The equity and debt issued by a firm are traded in two double-auction markets. In the Public treatment a signal carrying information about the firm’s value is known to all traders, while in the Private treatment, it is only disclosed to some randomly chosen participants. In treatment Public the conditions for capital structure irrelevance hold. The experimental results support the irrelevance of the capital structure but reject the rational expectations (risk-neutral) valuation. Treatment effects are significant and information is more efficiently embedded in prices in the Public treatment. The results from treatment Private on prices support the prior information over the rational expectations equilibrium. The analysis of the final portfolios of informed and uninformed participants suggests incomplete adjustment towards the prior information equilibrium predicted holdings.

Keywords: Experimental economics; Modigliani-Miller; Corporate finance (search for similar items in EconPapers)
JEL-codes: C92 G30 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10683-022-09757-8

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