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Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs: Reply

Stiglitz, Joseph E.

This paper reaffirms the earlier argument that when individuals differ in their expectations concerning the returns to investments, there will be an optimal debt-equity ratio, at a sufficiently high debt level. It assumes that in the judgment of lenders there is a finite probability of bankruptcy. The terms at which individuals as well as firms can borrow depends on their indebtedness and perceptions of potential lenders. Stapleton's analysis rests on the unacceptable assumption that individuals can borrow an arbitrary amount at the riskless rate, even though the firm in which they have all their wealth invested cannot. A new proof of the potentiality of productive inefficiency in the presence of bankruptcy is also presented.

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Bell Journal of Economics

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Business
Published Here
July 9, 2012
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