MARKET IMPERFECTIONS AND THE COST OF CAPITAL

Abstract

This paper has demonstrated the impacts of default risk, personal taxes, leverage‐related costs, and the limited liability of security‐holders on the systematic risk of equity. Since more than one of the aforementioned market imperfections exists in the real world, the results derived in this paper have been shown to be more general in specification than Hamada and Rubinstein's traditional formulation. The analysis also demonstrates that failure to recognize these market imperfections tends to bias the estimation of systematic risk.

Citation

Chen, K.C. and Shahrokhi, M. (1989), "MARKET IMPERFECTIONS AND THE COST OF CAPITAL", Managerial Finance, Vol. 15 No. 3, pp. 20-26. https://doi.org/10.1108/eb013616