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Handbook of the Economics of Finance by Rene M. Stulz, M. Harris, George M. Constantinides

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Chapter 4

Financing of Corporations

Stewart C. Myers*    Sloan School of Management, MIT* Some passages in this paper appeared in Myers (2001) I thank the Journal of Economic Perspectives for permission to repeat these passages I also thank René Stulz for helpful comments and Neeti Nundi for excellent research assistance.

Abstract

This review evaluates the four major theories of corporate financing: (1) the Modigliani–Miller theory of capital-structure irrelevance, in which firm values and real investment decisions are unaffected by financing; (2) the trade-off theory, in which firms balance the tax advantages of borrowing against the costs of financial distress; (3) agency theories, in which financing responds to managers’ personal incentives; and ...

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