Capital Structure Theory and the Fisher Effect

William A. Kelly, James Alan Miles

Research output: Contribution to journalArticle

Abstract

This paper incorporates capital structure theory to model the response of nominal interest rates to expected inflation in a world with taxes. Within an otherwise common framework, the model includes Modigliani‐Miller (MM) and Miller capital structure theory, as well as a variation of the Miller model with bankruptcy costs, developed by DeAngelo and Masulis. Within this framework, we derive an equation to predict the response of nominal interest rates under each capital structure hypothesis. With MM theory, our model predicts di D /d π value consistent with empirically observed ranges. With Miller theory, the predictions are inaccurate. With DeAngelo‐Masulis, the predictions vary widely; the midpoint of the predicted range is less accurate than with Miller theory.

Original languageEnglish (US)
Pages (from-to)53-73
Number of pages21
JournalFinancial Review
Volume24
Issue number1
DOIs
StatePublished - Jan 1 1989

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Fisher effect
Capital structure
Nominal interest rate
Prediction
Tax
Expected inflation
Bankruptcy costs

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

Kelly, William A. ; Miles, James Alan. / Capital Structure Theory and the Fisher Effect. In: Financial Review. 1989 ; Vol. 24, No. 1. pp. 53-73.
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Capital Structure Theory and the Fisher Effect. / Kelly, William A.; Miles, James Alan.

In: Financial Review, Vol. 24, No. 1, 01.01.1989, p. 53-73.

Research output: Contribution to journalArticle

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