Determining Capital Structure within Arbitrage-Based Production Framework

Zhao, Guo (2021): Determining Capital Structure within Arbitrage-Based Production Framework.

Abstract

To explore the interactions between financial decisions and production decisions of representative firm, we propose a dynamic production model under the joint constraints of technology, budget and no arbitrage. Theoretical and numerical analysis shows that dynamic production in no arbitrage equilibrium may undergo a bifurcation into a stable capital-intensive state and an unstable labor-intensive state. Further, it is shown that in no-arbitrage equilibrium a firm’s capital structure is endogenously determined by its endowment structure. These findings are consistent with empirical evidences and hence justify the no-arbitrage based production model as a useful framework with methodological advantages.

• Item Type: MPRA Paper
• Language: English
• Keywords: production theory, no arbitrage, multiple equilibria, conditional convergence, capital structure puzzle
• Subjects: D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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