This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.1991.tb03753.x

The Theory of Capital Structure

https://faculty.fuqua.duke.edu/~jgraham/website/SurveyPaper.PDF

The theory and practice of corporate finance: Evidence from the field

On robust estimation of the location parameter

This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

/pdf/deciphering-the-liquidity-and-credit-crunch-2007-08-3myt1ozynd.pdf

Deciphering the Liquidity and Credit Crunch 2007-08

This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.

/pdf/the-economics-of-small-business-finance-the-roles-of-private-3udpq27n5a.pdf

The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle

We consider default by firms that are part of a single clearing mechanism. The obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity. We first show, via a fixed-point argument, that there always exists a "clearing payment vector" that clears the obligations of the members of the clearing system; under mild regularity conditions, this clearing vector is unique. Next, we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms. Finally, we produce qualitative comparative statics for financial systems. These comparative statics imply that, in contrast to single-firm results, even unsystematic, nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms.

Systemic Risk in Financial Systems

This paper investigates the relation between stock liquidity and firm performance. The study documents that firms with liquid stocks have better performance as measured by the firm market-to-book ratio. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using two stage least squares, and the use of alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity --- the decimalization of stock trading --- and document that the increase in liquidity around decimalization improves firm performance. The causes of liquidity’s beneficial effect are investigated: Liquidity increases the information content of market prices and of performance sensitive managerial compensation. Finally, momentum trading, analyst coverage, investor overreaction, and the effect of liquidity on discount rates or expected returns do not appear to drive the results.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1918055_code365137.pdf?abstractid=1287646&mirid=2

Stock Market Liquidity and Firm Value

https://www.vivianfang.org/uploads/2/3/2/7/23272078/fangetal2009.pdf

Stock market liquidity and firm value

A firm must decide what security to sell to raise external capital to finance a profitable investment opportunity. There is ex ante asymmetry of information regarding the probability distribution of cash flow generated by the investment. In this setting, we derive necessary and sufficient conditions for a security to be optimal (uniquely optimal), that is, for pooling at this security to be an (the unique) equilibrium outcome. Using these conditions we show that the debt contract is (uniquely) optimal if and only if cash flows are ordered by (strict) conditional stochastic dominance. Finally, we derive an equivalence relationship between optimal security designs and designs that minimize mispricing.

Optimal Design of Securities under Asymmetric Information

In modern societies personal limited liability is the norm, given such conditions as finite wealth and the elimination of debtors’ prisons. In fact, over the last few centuries, many societies have taken this principle further by passing laws that allow investors in banks and other business enterprises to limit their losses to either their initial investment (pure corporate limited liability) or some multiple of their initial capital contribution. This latter liability structure might call for an additional infusion of funds on the part of investors up to some maximum (say, two times the investment) should an enterprise fail to meet its obligations from available resources. Bank shareholders, for example, were once routinely required to post at least some additional funds in the event of a bank failure. This practice ceased only after the substitution of public capital, in the form of government deposit insurance, for the private capital formerly used to support the system. Overall, changes in liability provisions, by many accounts, have been among the major influences on both the level and distribution of contemporary economic output as well as the allocation of financial resources in today’s financial markets.

This article reviews a large and growing literature on
the role of personal and corporate limited liability in the
Over the last few centuries laws have increasingly protected individuals and corporations from liability resulting from bad economic outcomes. This evolution in liability provisions, by many accounts, has significantly influenced both the level and distribution of contemporary economic output as well as the allocation of financial resources in today's financial markets.

Through a review of an extensive and growing literature, the authors of this article consider how limited liability affects investment, labor, and financing decisions made by individuals and corporations as well as government policies intended to promote economic growth or redistribute wealth. The authors first examine conflicts that may arise in labor markets because of certain rights held by providers of human capital or because some assumptions about personal limited liability may not be compatible with sustained production. The discussion then considers how liability rules influence the incentives of debtors, creditors, and managers. Finally, the authors look at the role of limited liability in the relationship between government and private institutions as it relates to economic growth and the provision of liquidity to the banking system.

By providing an explanation of incentive structures under alternative liability regimes, this article should help policymakers better understand the possibly unintended effects of certain policies and programs.

Thomas H. Noe

Papers

Systemic Risk in Financial Systems

Stock Market Liquidity and Firm Value

Stock market liquidity and firm value

Optimal Design of Securities under Asymmetric Information

The Buck Stops Where? The Role of Limited Liability in Economics