Capital Structure and Dividend Irrelevance with Asymmetric Information

Philip H. Dybvig · Jaime F. Zender

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Corporate Finance and Governance Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

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.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1958The Cost of Capital, Corporation Finance and the Theory of Investment 2008The cost of capital, corporation finance and the theory of investment 1961Dividend Policy, Growth, and the Valuation of Shares 1963CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION 1973The Economic Theory of Agency: The Principal's Problem.1977The Determination of Financial Structure: The Incentive-Signalling Approach 1985Dividend Policy under Asymmetric Information

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