Risk of Bankruptcy and the Modigliani-Miller theorem in a General Equilibrium model of Socially Responsible Investing

Fabian Alex

No 241, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: In the SRI-augmented version of the Arrow-Debreu-model by Arnold (2023), the restriction to no risk of bankruptcy is immaterial. Furthermore, shareholder unanimity is still valid when a firm’s bond issuance (viz., its leverage) is chosen endogenously. The debt-equity-ratio of firms may not only be set arbitrarily (independent of their capital choice) with respect to shareholder value, but also to entire budget sets, implying an economy-wide Modigliani-Miller type of irrelevance given market completeness. If SRI leads individuals to constrain the set of assets they are prepared to buy and, thus, reduces their personal marketed subspace, over-indebtedness may restore it.

Keywords: socially responsible investing; general equilibrium; complete markets; Modigliani-Miller; asset pricing; Arrow-Debreu (search for similar items in EconPapers)
JEL-codes: D51 D52 D53 G12 G33 M14 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025-06
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