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The changing nature of debt and equity; a financial perspective

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  • Franklin Allen

Abstract

As a result of the historical importance of debt and equity, the traditional focus of inquiry into firms’ choice of capital structure has been "What is the optimal debt/equity ratio?" This approach lead to the Modigliani and Miller theorems and a large body of subsequent work but has not been very successful in explaining firms’ actual choices of debt and equity. The notion that firms finance their activities with debt and equity is a simplification; corporations have issued securities other than standard debt and equity for many centuries. This fact and the rapid pace of financial innovation in recent years suggests that a more fundamental issue than "What is the optimal debt/equity ratio?" is "What are the optimal securities that should be issued?" This paper surveys recent studies of capital structure that have looked at this question.
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Suggested Citation

  • Franklin Allen, 1989. "The changing nature of debt and equity; a financial perspective," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 33, pages 12-48.
    • Handle: RePEc:fip:fedbcp:y:1989:p:12-48:n:33
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    File URL: http://www.bostonfed.org/economic/conf/conf33/conf33b.pdf
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    Cited by:

    1. Houston, Joel F. & Venkataraman, S., 1996. "Liquidation under moral hazard: Optimal debt maturity and loan commitments," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 115-133, January.
    2. Bohn, Henning, 1995. "Towards a theory of incomplete financial markets A review essay," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 433-449, November.
    3. Matthew Spiegel & S. Ravid, 1998. "Optimal Financial Contracts for a Start-Up with Unlimited Operating Discretion," Yale School of Management Working Papers ysm77, Yale School of Management, revised 01 Aug 2000.

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