Some Fallacies in Corporate Finance: A Coasean Perspective

Abstract

This paper argues that the M&M Irrelevance Theorem is subsumed by the Coase Theorem. This insight leads us to critique two fundamental results offered by the corporate finance literature. Specifically, we reject the claim by DeAngelo and DeAngelo (2006) that dividends are relevant in frictionless markets. In addition, we reject the claim by Myers (1977) that corporate investment is negatively related to leverage in frictionless markets (the so-called underinvestment problem). We further argue that notions of underinvestment/overinvestment are not meaningful even in a world of positive transactions costs.