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Capital Structure and Dividend Irrelevance with Asymmetric Information

Philip H. Dybvig1; Jaime F. Zender2

1 Washington University in St. Louis · 2 University of Utah

Review of Financial Studies 1991

The Modigliani and Miller propositions on the irrelevancy of capital structure and dividends are shown to be valid in a large class of models with asymmetric information. The main assumption is that managerial compensation is chosen optimally. This differs from most of the recent articles on this topic, which impose by fiat a suboptimal contract. Even when imperfections internal to the firm preclude optimal investment, there is a separation between incentives and financing. We conclude that corporations should move toward contracts with better incentives, and that new models should be built that recognize the limitations to optimal contracting.

DOI
10.1093/rfs/4.1.201
Volume
4 (1)
Pages
201-219
Language
en
Export
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