Market imperfections, capital market equilibrium and corporate finance

Abstract

THIS PAPER IS CONCERNED WITH TWO TYPES of market segmentation and their implications for corporate financial decisions. The first type is caused by restric tions on certain individuals investing in certain securities and is exemplified by segmentation in international capital markets. The second type is induced by the simultaneous existance of differential personal tax rates and a fixed element of transactions costs. Segmentation of the former type produces incentives for firms to merge and affects the cost of capital, while the latter type raises questions about the tax effect of dividend policy. The framework of the analysis is the single period capital asset pricing model (CAPM).