GOVERNMENT POLICY AND THE FIRMS CAPITAL STRUCTURE

The purpose of this paper is to examine the effects of commonly observed forms of government intervention on the firm's capital structure. We show that since market claims against the firm are always 'properly' priced, the firm is 'forced' to take market claimants' interests into account. On the other hand, since government claims are, usually, not adjusted for risk, the firm can 'take advantage' of the government. It does so by choosing strategies that extract maximum value (minimum cost) from these policies. In particular, the firm uses its capital capital structure to maximize the value of the policy, thus leading to a determinate capital structure.