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Determining Capital Structure within Arbitrage-Based Production Framework

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  • Zhao, Guo

Abstract

To explore the interactions between financial decisions and production decisions of representative firm, we propose a dynamic production model under the joint constraints of technology, budget and no arbitrage. Theoretical and numerical analysis shows that dynamic production in no arbitrage equilibrium may undergo a bifurcation into a stable capital-intensive state and an unstable labor-intensive state. Further, it is shown that in no-arbitrage equilibrium a firm’s capital structure is endogenously determined by its endowment structure. These findings are consistent with empirical evidences and hence justify the no-arbitrage based production model as a useful framework with methodological advantages.

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  • Zhao, Guo, 2021. "Determining Capital Structure within Arbitrage-Based Production Framework," MPRA Paper 108492, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108492
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    References listed on IDEAS

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    More about this item

    Keywords

    production theory; no arbitrage; multiple equilibria; conditional convergence; capital structure puzzle;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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