Revisiting M&M with Taxes: An Alternative Equilibrating Process

Authors

Zhichuan Li, Western UniversityFollow
Kenneth J. Kopecky, Temple University
Timothy F. Sugrue, Clarkson University
Alan Tucker

Document Type

Article

Publication Date

1-16-2018

Volume

6

Issue

1

Journal

International Journal of Financial Studies

First Page

10

URL with Digital Object Identifier

https://doi.org/10.3390/ijfs6010010

Abstract

Modigliani and Miller present an equity-quantity shifting equilibrating process to achieve an optimal firm value in the presence of corporate taxes. However, in the era in which they derived their various propositions regarding the relation between a firm’s value and its capital structure, well-capitalized takeover specialists including private equity firms and sovereign funds did not exist, at least by today’s standards. In this paper we develop a simple arbitrage strategy, made viable by the presence of takeover firms, which presents an alternative equilibrating process to achieve the same optimal firm value. This alternative process is markedly different from that of the Modigliani and Miller theorem in terms of its predictions for debt use and restores the prospect of capital structure irrelevancy despite the existence of corporate taxes.

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Citation of this paper:

Kopecky, K., Li, Z.F., Sugrue, T.F., Tucker, A. 2018. Revisiting M&M with Taxes: An Alternative Equilibrating Process. International Journal of Financial Studies 6(1): 10.