Capital Structure Equilibrium under Incomplete Market Conditions

Lemma W. Senbet and Robert A. Taggart, Jr.

No 747, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Most discussions of corporate capital structure have been set in the context of a complete capital market. In this paper we study the determinants of capital structure for the incomplete markets case, where incompleteness manifests itself in the form of divergent borrowing and lending rates. We argue that firms have a natural incentive to tailor their financing choices so as to narrow such divergences. While this implies an optimal capital structure for firms in the aggregate, however, competition will drive out profits, and the capital structure of any individual firm may still be a matter of indifference. Firms' incentive to try to complete the market provides a rationale for corporate finance even in a taxless environment. This incentive may also shed light on such related issues as corporate mergers, the use of complex securities and the role of financial intermediaries.

Date: 1981-09
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Senbet, Lemma W. and Robert A. Taggart, Jr. "Capital Structure Equilibriumunder Market Imperfections and Incompleteness." Journal of Finance, Vol. 3 9, No. 1, (March 1984), pp. 93-103.

Downloads: (external link)
http://www.nber.org/papers/w0747.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:0747

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w0747

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().