Testing the Modigliani-Miller theorem directly in the lab
Source
Experimental Economics, 15, 4, (2012), pp. 693-716ISSN
Publication type
Article / Letter to editor

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Organization
Financiële economie en ondernemingsfinanciering
Journal title
Experimental Economics
Volume
vol. 15
Issue
iss. 4
Languages used
English (eng)
Page start
p. 693
Page end
p. 716
Subject
Distributional Conflicts in a Globalizing World: Consequences for State-Market-Civil Society ArrangementsAbstract
We present an experiment designed to test the Modigliani-Miller theorem. Applying a general equilibrium approach and not allowing for arbitrage among firms with different capital structures, we find that, in accordance with the theorem, participants well recognize changes in the systematic risk of equity associated with increasing leverage and, accordingly, demand higher rate of return. Yet, this adjustment is not perfect: subjects underestimate the systematic risk of low-leveraged equity whereas they overestimate the systematic risk of high-leveraged equity, resulting in a U-shaped cost of capital. A (control) individual decision-making experiment, eliciting several points on individual demand and supply curves for shares, provides some support for the theorem.
This item appears in the following Collection(s)
- Academic publications [204996]
- Electronic publications [103294]
- Nijmegen School of Management [12944]
- Open Access publications [71819]
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