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Some Aspectes of the Pure Theory of Corporate Finance: Bankrupticies and Take-Overs: Comment

Richard C. Stapleton
The Bell Journal of Economics
Vol. 6, No. 2 (Autumn, 1975), pp. 708-710
Published by: RAND Corporation
DOI: 10.2307/3003255
Stable URL: http://www.jstor.org/stable/3003255
Page Count: 3
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Some Aspectes of the Pure Theory of Corporate Finance: Bankrupticies and Take-Overs: Comment
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Abstract

In a recent paper in this Journal, Stiglitz purports to show that leverage may affect the value of the firm in competitive capital markets if the possibility of bankruptcy and the differential expectations between stock holders and bond holders are admitted. However, Stiglitz argues that leverage may reduce the value of the firm, and this note shows, for Stiglitz' special case and in general, that leverage cannot reduce the value of the firm. The Modigliani-Miller arbitrage argument holds, since investors can always undo the leverage of the firm, even when markets are not complete. Whether leverage can increase the value of the firm under incomplete markets is still an open issue.

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