Abstract
In this chapter, I first derive the Arbitrage Theorem, and use the theorem to show that, in a complete market with no transaction costs and no arbitrage, all securities or assets are derivatives for each other, and they are dependent on each other. It also shows a capital structure irrelevancy proposition: changes in firms’ debt-equity ratios will not affect equityholders’ wealth (welfare), and equityholders’ preferences toward risk (or variance) are irrelevant. When the firm moves from a more certain project to a more uncertain one, the time-0 price of equity will increase, but the time-0 prices of fixed-income assets will decrease. Different labor contractual arrangements will not affect the time-0 price of labor input. When the firm moves from a more certain project to a more uncertain one, the time-0 price of labor input will increase if it is under the share or the mixed contract.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
