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- Title
Bankruptcy, Limited Liability, and the Modigliana-Miller Theorem.
- Authors
Hellwig, Martin F.
- Abstract
This article examines the validity of the Modigliani-Miller theorem in the presence of bankruptcy. The theorem affirms that the value of a firm and the set of return patterns that the capital markets offer to private investors are independent of firm debt-equity ratios. The proof of the theorem is the presumption that, in perfect capital markets, borrowing by firms and by individuals can be perfect substitutes. The author of this paper concludes that: if only securities issued by firms serve as collateral, the validity of the Modigliani-Miller theorem in the presence of bankruptcy depends on whether or not short sales of all securities are permitted; and, if securities issued by individuals as well as securities issued by firms serve as collateral, the Modigliani-Miller theorem is generally valid, even if short sales are prohibited.
- Subjects
BANKRUPTCY; ECONOMICS; CAPITAL market; INDIVIDUAL investors; DEBT-to-equity ratio; SECURITIES trading; FINANCIAL markets; COLLATERALIZED debt obligations
- Publication
American Economic Review, 1981, Vol 71, Issue 1, p155
- ISSN
0002-8282
- Publication type
Article