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- Title
The Effects of a Firm's Investment and Financing on the Welfare of its Security Holders.
- Authors
Fama, Eugene F.
- Abstract
This paper shows that me-first rules are also unnecessary. Propositions about the irrelevance of the financing decisions of firms can be built either on the assumption that investors and firms have equal access to the capital market or on the assumption that no firm issues securities for which there are not perfect substitutes from other firms. With either approach one can show that if the capital market is perfect, then (a) a firm's financing decisions have no effect on its market value, and (b) its financing decisions are of no consequence to its security holders. Much of the early literature is concerned with the proposition that the market value of a firm is unaffected by its financing decisions, and most of the early proofs use arbitrage arguments. The general idea is that if the financing decisions of a firm affect its market value, there are arbitrage opportunities that can be used to produce costless instantaneous increases in wealth. Since the existence of such opportunities is inconsistent with equilibrium in a perfect capital market, one can conclude that the market value of a firm is unaffected by its financing decisions.
- Subjects
INVESTMENTS; CAPITAL market; SECURITY holders; ECONOMIC equilibrium; ARBITRAGE; CORPORATE debt; CORPORATE finance; INVESTORS; DECISION making; MARKET value; SECURITIES; BUSINESS enterprises
- Publication
American Economic Review, 1978, Vol 68, Issue 3, p272
- ISSN
0002-8282
- Publication type
Article