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RFS Advance Access published online on October 15, 2003
Review of Financial Studies, doi:10.1093/rfs/hhg045
Review of Financial Studies © The Society for Financial Studies 2003; all rights reserved
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© 2003 The Society for Financial Studies

Original Articles

A Theory of Corporate Capital Structure and Investment

Miguel Cantillo 1*
1 IICE, Universidad de Costa Rica

* To whom correspondence should be addressed. E-mail: cantillo{at}stanfordalumni.org.


  Abstract

This article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries. In the model, investors have a generic lending technology which they can improve at a cost. Those who upgrade become intermediaries to exploit their advantage. However, conflicts with depositors will limit the banks' market presence, and they will only lend to moderately endowed firms while bondholders will finance cash rich corporations. The article also analyzes the extent to which investors adopt the superior lending technique, the nature of bank competition, and how corporate and bank conditions affect interest rates and investment.


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