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Capital structure, principal/agency--Relation and the value of the corporation: A simulation study

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  • Landes, T
  • Loistl, O

Abstract

We assume that a corporation yields an uncertain stream of future earnings devoted to meet the contractual payments to creditors and dividends to shareholders. Fluctuating earnings and fixed obligations of payment embody a risk of illiquidity which might lead to bankruptcy. According to the principal/agency-approach, different capital structures might therefore lead to different streams of earnings. Relying on the present-value concept, these conclusions imply that the value of the corporation and especially that of equity is influenced by its capital structure. The implications of the model will be checked against the situation of three major German companies. It is shown that the computational results are compatible with the empirical observed quotations of share price.

Suggested Citation

  • Landes, T & Loistl, O, 1991. "Capital structure, principal/agency--Relation and the value of the corporation: A simulation study," Omega, Elsevier, vol. 19(4), pages 291-303.
    • Handle: RePEc:eee:jomega:v:19:y:1991:i:4:p:291-303
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