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 ...
