A Survey of Corporate Finance Theory (I) : The Divergence of Costs of Capital and "Pecking Order" of the Funds to Finance(Special Issue Dedicated to Professor Kuniyuki SHOYA)

Intuitively, a firm's investment decisions are affected by the resource of external funds. In Japan, this aspect would be emphasized by bankruptcy of the banking firms and the security companies that have not ever seen. But in views of "MM theorem", the relation between a firm's investment decision and its resource of funds no longer matters because of arbitrage of the external investors. In this part of our paper, we survey the corporate finance theories started by Modigliani and Miller (1958) and its corrections. Some corrections are that the firms prefer debt finance because of tax advantage, other that prefer internal fund and equity finance tends not to prefer due to asymmetric information. These corrections refer to "pecking order" theory. But they assert that firm's investment decisions are the same as the standard macroeconomic investment theories. This implies that firms can always invest a project as long as the marginal return of investment equals to the cost of capital. Therefore, each firm can't face the inefficiencies of investment.10KJ00005058171論文Articledepartmental bulletin pape