- A-Z
- Jena Economic Resea...
- Volume 2
- Testing the Modigli...
- Autor(in)
- Erschienen
- 8. Juli 2008
- Nummer des Discussion-Papers
-
2008-056
- Schlagwort(e)
-
Decision Making under Uncertainty
Experimental Study
General Equilibrium
Modigliani-Miller Theorem
- Zusammenfsg.
-
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.
- article pub. typess JER
- Research article
- article languages JER
- Englisch
- article research fields JER
- experimental economics
- JEL-Classification for JER
- G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure ; C91 - Laboratory, Individual Behavior ; G12 - Asset Pricing; Trading volume; Bond Interest Rates ; D53 - Financial Markets