skip to primary navigationskip to content
 

CF Weekly Workshop - by Ranadeva Jasasekera and Dr Gerhard King - 'A general theory of the firm'

When Nov 20, 2012
from 05:00 PM to 06:00 PM
Where Barbara White Room, Newnham College
Contact Name
Add event to calendar vCal
iCal

Gerhard King (University of Southampton) and Ranadeva Jayasekera (University of Southampton and ex Cambridge PhD)

'A general theory of the firm'

We develop a general theory of the firm that models investment and financing decisions simultaneously. Equity holders maximise shareholder value over an infinite time horizon through selecting optimal time paths of capital stock. Growth in capital stock is subject to investment constraints determined by the availability of internal and external finance. In order to reach the steady state faster and maximise value, equity holders can select debt and equity issues. The firm's investment decision and exogenous price shocks influence cash flows. Hence, the firm exhibits default risk due to exogenous shocks and investment decisions.

Debt holders select the debt ceiling, which defines the firm's debt capacity, to control their exposure to default risk. Cost of debt is determined on the market for external finance and reflects default risk.

The model shows that capital structure affects firm value if the firm has not reached its steady state. In the absence of information asymmetry, the model establishes a pecking order of internal and external finance. Once the firm approaches its steady state, the model converges to the classic Irrelevance Theory. Hence, the model is a general theory of the special case described by Modigliani and Miller (1958).

« May 2017 »
May
MoTuWeThFrSaSu
1234567
891011121314
15161718192021
22232425262728
293031

Upcoming events

Cambridge Finance Workshop - Katrin Tinn

Jun 01, 2017

Room W4.03, Cambridge Judge Business School

Cambridge Finance Workshop - Geert Bekaert

Jun 15, 2017

Room W4.03, Cambridge Judge Business School

Previous events

Upcoming events