Revisiting M&M with Taxes: An Alternative Equilibrating Process

Kopecky, K., Z.F. Li, T.F. Sugrue, and A.L. Tucker. 2018. Revisiting M&M with Taxes: An Alternative Equilibrating Process. International Journal of Financial Studies 6(1): 10

12 Pages Posted: 23 Oct 2017 Last revised: 17 Jan 2018

See all articles by Kenneth J. Kopecky

Kenneth J. Kopecky

Temple University - Department of Finance

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business

Timothy F. Sugrue

Clarkson University

Alan Tucker

Independent

Date Written: January 2, 2018

Abstract

Modigliani and Miller (1963) present an equity-quantity shifting equilibrating process to achieve an optimal firm value. However, in the era in which they derived their various propositions regarding the relation between a firm’s value and its capital structure, well-capitalized takeover specialists including private equity firms and sovereign funds did not exist, at least by today’s standards. In this paper we develop a simple arbitrage strategy, made viable by the presence of takeover firms, which presents an alternative equilibrating process to achieve the same optimal firm value. This alternative process is markedly different from that of Modigliani and Miller (1963) in terms of its predictions for debt use and restores the prospect of capital structure irrelevancy (Modigliani and Miller 1958) despite the existence of corporate taxes.

Keywords: Capital Structure; Debt; Interest Deduction; Equity Price Adjustment

JEL Classification: G30; G32

Suggested Citation

Kopecky, Kenneth J. and Li, Zhichuan Frank and Sugrue, Timothy F. and Tucker, Alan, Revisiting M&M with Taxes: An Alternative Equilibrating Process (January 2, 2018). Kopecky, K., Z.F. Li, T.F. Sugrue, and A.L. Tucker. 2018. Revisiting M&M with Taxes: An Alternative Equilibrating Process. International Journal of Financial Studies 6(1): 10. Available at SSRN: https://ssrn.com/abstract=3057387 or http://dx.doi.org/10.2139/ssrn.3057387

Kenneth J. Kopecky

Temple University - Department of Finance ( email )

Fox School of Business and Management
329 Speakman Hall
Philadelphia, PA 19122
United States
(215) 204-8279 (Phone)

HOME PAGE: http://www.sbm.temple.edu/%7Ekkopecky/

Zhichuan Frank Li (Contact Author)

University of Western Ontario - Ivey School of Business ( email )

1151 Richmond Street North
London Ontario, Ontario N6A 3K7
Canada

Timothy F. Sugrue

Clarkson University ( email )

United States

Alan Tucker

Independent ( email )

No Address Available
United States

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