Resource title

Testing the Modigliani-Miller theorem directly in the lab: a general equilibrium approach

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Resource description

In this paper, we experimentally test the Modigliani-Miller theorem. Applying a general equilibrium approach and not allowing for arbitrage among firms with different capital structure, we are able to address a question fundamental to the valuation of firms: does capital structure affect the value of the firm? If so, how? We find that, consistent with the Modigliani-Miller theorem, experimental subjects well recognized the increased systematic risk of the equity with increasing leverage and accordingly demanded higher rate of return. Yet, this adjustment was not perfect: subjects underestimated the systematic risk of low leveraged equity whereas overestimated the systematic risk of high leveraged equity, resulting in a U shape weighted average cost of capital

Resource author

Prashanth Mahagaonkar, Jianying Qiu

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Resource publish date

Resource language

eng

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text/html

Resource resource URL

http://hdl.handle.net/10419/25738

Resource license

Adapt according to the presented license agreement and reference the original author.