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

Published online by Cambridge University Press:  06 April 2009

Robert H. Litzenberger
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 21 , Issue 1 , March 1986 , pp. 59 - 71
Copyright
Copyright © School of Business Administration, University of Washington 1986

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