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"Agency Costs"
*MM model overstates value of leverage since it ignores financial distress and agency
costs.
New formula is reduced by these two factors.
Pecking Order Hypothesis (hierarchy where to source the money)
-firms prefer Internal to External
-Asymmetric Information: firms managers know more about the company than outsiders
thus act in its best interest
-Corporations retain sufficient financial slack (cash and marketable sec holdings as
well as unused risk free debt capacity)
Signaling Model of Financial Structure
-ability to get debt is a good signal
-existing shareholders invariably consider leverage increasing events to be "good news"
and leveraging decreasing events to be "bad news"
*ownership structure clearly seem to influence capital structures. more concentrated
(kayo kayo lang so you go out to borrow), the more debt it tolerates. Family-owned firms
more levered(debts). [Atomistic vs Concentrated]
*corp that are forced away from a preferred capital structure tend to return to that
structure over time (so theres an optimal structure)
MM: Whatever Divident policy the company adopts, you can undo it. It doesn't matter
The Rightists (High Payout View)
-in favor of liberal dividends. increased dividends, shareholders better off
-dividend in hand is worth more than capital gain in the bush
-div today are certain; toms capital gain are risky
Radical Left
-capital gains are better than receiving dividends
Theory
Irrelevance Bird in hand Tax preference -
Implications
any payout ok
lower cost of equity, higher stock price
vice versa