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Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information

Published online by Cambridge University Press:  14 March 2025

Arturo Macias Open the ORCID record for Arturo Macias [Opens in a new window]
Arturo Macias*
Affiliation:
Universidad Nacional de Educacion a Distancia (UNED) and Banco de España, Madrid, Spain
*
arturo.macias@bde.es
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Abstract

This article presents a laboratory experiment about capital structure irrelevance. The equity and debt issued by a firm are traded in two double-auction markets. In the Public treatment a signal carrying information about the firm’s value is known to all traders, while in the Private treatment, it is only disclosed to some randomly chosen participants. In treatment Public the conditions for capital structure irrelevance hold. The experimental results support the irrelevance of the capital structure but reject the rational expectations (risk-neutral) valuation. Treatment effects are significant and information is more efficiently embedded in prices in the Public treatment. The results from treatment Private on prices support the prior information over the rational expectations equilibrium. The analysis of the final portfolios of informed and uninformed participants suggests incomplete adjustment towards the prior information equilibrium predicted holdings.

Keywords

Experimental economicsModigliani-MillerCorporate finance

JEL classification

G30: General C92: Laboratory, Group Behavior
Type
Original Paper
Information
Experimental Economics , Volume 25 , Issue 5 , December 2022 , pp. 1418 - 1440
Copyright
Copyright © The Author(s), under exclusive licence to Economic Science Association 2022

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Footnotes

Supplementary Information The online version contains supplementary material available at https://doi.org/10.1007/s10683-022-09757-8.

This article was developed within the Interuniversity Doctorate in Economics (DECIDE). I want to thank Marc Vorsatz (UNED) for his research direction and the Ministerio de Economia y Competitividad (Government of Spain) for its support through project ECO2015 65701-P. I am solely responsible for any errors.

Replication materials available at https://osf.io/3ygja/download this link.

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