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Rev Fin 1991; 4:201-219
© 1991 the Society for Financial Studies

Article

Capital structure and dividend irrelevance with asymmetric information

PH Dybvig1 and JF Zender2
1 Olin School of Business, Washington University, Campus Box 1133, St. Louis, MO 63130, USA
2 University of Utah, Utah, USA

Abstract

The Modigliani and Miller propositions on the irrelevancy of capital structure and dividends are shown to be valid in a large class of models with asymmetric information. The main assumption is that managerial compensation is chosen optimally. This differs from most of the recent articles on this topic, which impose by fiat a suboptimal contract. Even when imperfections internal to the firm preclude optimal investment, there is a separation that corporations should move toward contracts with better incentives, and that new models should be built that recognize the limitations to optimal contracting.


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