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Title: Testing the Modigliani-Miller theorem directly in the lab
Author(s): Levati, M.; Qiu, J. ; Mahagaonkar, P.
Publication year: 2012
Source: Experimental Economics, vol. 15, iss. 4, (2012), pp. 693-716
Number of Pages: 24 p.
ISSN: 1386-4157
DOI: https://doi.org/10.1007/s10683-012-9322-z
Publication type: Article / Letter to editor

Please use this identifier to cite or link to this item : http://hdl.handle.net/2066/111867   http://hdl.handle.net/2066/111867

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Subject: Distributional Conflicts in a Globalizing World: Consequences for State-Market-Civil Society Arrangements
Organization: Financiële economie en ondernemingsfinanciering
Journal title:
Experimental Economics
Volume: vol. 15
Issue: iss. 4
Page start: p. 693
Page end: p. 716
Abstract:
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.
Languages used: English (eng)

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