This paper provides a capital structure equilibrium analysis in an environment characterized by market incompleteness and risky debt. Market incompleteness, together with a comparative advantage for corporate borrowing, leads to a Miller (1977)-type capital structure equilibrium wherein each firm within an industry faces an indeterminate debt level. However, at the aggregate-industry level, corporations act as financial intermediaries to generate cross-sectional capital structure patterns across industries, despite the fact that rents associated with financial intermediation services dissipate in equilibrium for any particular firm. Additional implications are drawn for observed cross-sectional and time-series regularities in capital structure. © 1995.
CITATION STYLE
Ronn, E. I., & Senbet, L. W. (1995). Debt and market incompleteness. Journal of Banking and Finance, 19(8), 1379–1400. https://doi.org/10.1016/0378-4266(94)00120-R
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