Equilibrium Corporate Finance

Abstract

We study a general equilibrium model with production where financial markets are incomplete. At a competitive equilibrium firms take their production and financial decisions so as to maximize their value. We show that shareholders unanimously sup- port value maximization. Furthermore, competitive equilibria are constrained Pareto efficient. Finally the Modigliani-Miller theorem typically does not hold and the firms’ corporate financing structure is determined at equilibrium. Such results extend to the case where informational asymmetries are present and contribute to determine the firms’ capital structure.