Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-05T11:02:57.607Z Has data issue: false hasContentIssue false
  • English
  • Français

On the Asset Substitution Problem

Published online by Cambridge University Press:  06 April 2009

Bezalel Gavish  and
Avner Kalay
Get access Rights & Permissions [Opens in a new window]

Extract

In their seminal paper, Modigliani and Miller [11], [12] demonstrate that if capital markets are perfect and investment policy is held constant, the market value of the firm is independent of its financial decisions. Furthermore, if capital markets are perfect, stockholders have incentive to choose the investment policy which maximizes the market value of the firm (see [6]). Motivated by this assumption, the firm has been viewed as a “black box;” namely, as one homogeneous unit whose clear objective is to maximize its market value. However, in a growing body of recent literature (see [1], [2], [7], [9], [13], and [14]), researchers recognize that the firm in an “imperfect” capital market is a collection of groups whose interests can, and do, conflict. Jensen and Meckling [9] study the roles of three important groups—the owner-manager, the stockholders, and the bondholders—focusing on the potential costs resulting from divergence of interests among them. They provide a theory of optimal capital structure in terms of reducing the costs of these conflicts.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 1 , March 1983 , pp. 21 - 30
Copyright
Copyright © School of Business Administration, University of Washington 1983

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Barnea, A.; Haugen, R.; and Senbet, L.. “A Rationale for Debt Maturity Structure and Call Provisions in the Agency Theoretic Framework.” The Journal of Finance, Vol. 35 (12 1980), pp. 1223–1234.CrossRefGoogle Scholar
[2]Barnea, A.; Haugen, R.; and Senbet, L.. “An Equilibrium Analysis of Debt Financing under Costly Tax Arbitrage and Agency Problems.” The Journal of Finance, Vol. 36 (06 1981), pp. 569–581.CrossRefGoogle Scholar
[3]Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, Vol. 81 (05–06 1973), pp. 637–654.CrossRefGoogle Scholar
[4]Fama, E. F. “The Effects of a Firm's Investment and Financing Decisions on the Welfare of the Security Holders.” The American Economic Review, Vol. 68 (06 1978), pp. 272–284.Google Scholar
[5]Fama, E. F. “Agency Problems and the Theory of the Firm.” Journal of Political Economy, Vol. 88 (04 1980), pp. 288–307.CrossRefGoogle Scholar
[6]Fama, E. F., and Miller, M.. The Theory of Finance. N.Y.: Holt, Rinehart and Winston (1972).Google Scholar
[7]Galai, D., and Masulis, R. W.. “The Option Pricing Model and the Risk Factor of Stocks.” Journal of Financial Economics, Vol. 3 (03 1976), pp. 53–81.CrossRefGoogle Scholar
[8]Gavish, B., and Kalay, A.. “On the Asset Substitution Problem.” Working paper, Graduate School of Business Administration, New York University (1982).Google Scholar
[9]Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Cost, and Capital Structure.” Journal of Financial Economics, Vol. 3 (10 1976), pp. 305–360.Google Scholar
[10]Merton, R. “On the Pricing of Corporate Debt.” The Journal of Finance, Vol. 29 (05 1974), pp. 449–470.Google Scholar
[11]Miller, M. H., and Modigliani, F.. “Dividend Policy Growth and the Valuation of Shares.” Journal of Business, Vol. 34 (10 1961), pp. 411–433.Google Scholar
[12]Modigliani, F., and Miller, M. H.. “The Costs of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review, Vol. 48 (05 1958), pp. 433–443.Google Scholar
[13]Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, Vol. 5 (11 1977), pp. 147–175.Google Scholar
[14]Smith, C, and Warner, J.. “On Financial Contracting: An Analysis of Bond Covenants.” The Journal of Financial Economics, Vol. 7 (06 1979), pp. 117–161.Google Scholar