Miller has analyzed capital structure in the presence of both corporate and personal taxes. The present work investigates the effect of inflation on both interest rates and equity returns when the Miller equilibrium condition is employed in a loanable funds model. Both an interest rate effect and a redistribution effect are derived. The interest rate effect forces the responsiveness of the interest rate to the inflation rate to be below that hypothesized by Darby. However, the redistribution effect may change this responsiveness in either direction.

The recent world-wide increase in consumer prices has created an intense interest in inflation on the part of both the academic and the financial communities. For example, in his American Financial Association presidential address, Professor Lintner [4, p. 259] states “few matters are of more serious concern to students of finance and to members of the financial community than the impacts of inflation on our financial institutions and markets and its implication for investment policy.”

It has been suggested that information has the three following uses:1. Information can be employed to earn trading profits.2. Information can improve the operating decisions of a firm or group of firms and thereby increase the stock price.3. Information can reduce the risk of a firm or group of firms and thereby increase the stock price.

Financial economists seem to believe that takeovers are partly motivated by the desire to improve poorly performing firms. However, prior empirical evidence in support of this inefficient management hypothesis is rather weak. We provide a detailed re-examination of this hypothesis in a large scale empirical study. We find little evidence that target firms were performing poorly before acquisition, using either operating or stock returns. This result holds both for the sample as a whole and for subsamples of takeovers that are more likely to be disciplinary. We conclude that the conventional view that targets perform poorly is not supported by the data.

Academic literature, practitioners, courts, and regulators routinely assert that both private and subsidiary targets sell at discounts relative to public targets. However, the empirical evidence to support this conclusion is thin. Our work alters the methodology from prior research to avoid biases due to both one-sided sample truncation and Jensen’s inequality. Following these changes, we find no evidence that unlisted targets sell at discounts. Our results hold under a number of different approaches and after controlling for known determinants of acquisition pricing.