The Modigliani and Miller Theorem and the Integration of Financial Markets

Most of the recent literature on risk management and capital structure examines settings where the markets for different securities, (e.g., debt, equity, and derivative markets) are perfectly integrated. This paper presents anecdotal evidence that suggests that financial markets often are not integrated and discusses the implications of this lack of integration on corporate financing strategies. In particular, I argue that “market conditions,” which are determined by the preferences of individuals and institutions that supply capital, can have an important effect on how firms raise capital and the extent to which they hedge.