Property Rights and Corporate Finance

Abstract

We examine a central result in corporate finance – the Modigliani-Miller capital structure irrelevance proposition – from a Coasian property rights perspective. Building upon the work of Coase, Demsetz and Cheung, we develop an enabling methodology to study the impact of positive Coasian transaction costs. When the Modigliani-Miller assumption of default-free debt is relaxed in the analysis of corporate leverage, either long-lived transaction costs related to property rights must be explicitly assumed away, or long-lived transaction costs related to property rights must be incorporated into the analysis.