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Capital Structure and Dividend Irrelevance with Asymmetric Information

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  • Dybvig, Philip H
  • Zender, Jaime F
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. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Dybvig, Philip H & Zender, Jaime F, 1991. "Capital Structure and Dividend Irrelevance with Asymmetric Information," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 201-219.
    • Handle: RePEc:oup:rfinst:v:4:y:1991:i:1:p:201-19
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    1. Dybvig, Philip H, 1988. "Distributional Analysis of Portfolio Choice," The Journal of Business, University of Chicago Press, vol. 61(3), pages 369-393, July.
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    7. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
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