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Miller-Collateral Modigliani Model: A Case Study

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collateral. This prediction seems to be in disparity with the generally accepted wisdom in the banking sector, which associates the use of collateral with clearly risky borrowers. With inclusion of the pre-loan credit measurement, commercial lenders assess the riskiness of the potential borrowers and require the remarkably risky borrowers to pledge big extend of collateral Morsman (1986); Hempel, Coleman, and Simonson (1986).
This forecast is also in contrary to the small amount of empirical work addressing the issue of collateralization and its effect on loan quality. Orgler (1970) compiled a database on individual loans from bank examination files and differentiated well from bad loans on the basis of whether the loans were eventually criticized …show more content…

As a result of this statement, firms could go for an all-debt capital structure. Gapenski, (1996), conversely, contend that the Miller-Modigliani model is true only in theory, because in practice, bankruptcy costs exist and will even increase when equity is traded off for debt. In an effort to confirm Miller-Modigliani theory in Kenya, Maina and Kondongo (2013) probed the effect of debt-equity ratio performance of firms listed at the Nairobi Securities exchange. A survey of all companies listed at the Nairobi Security Exchange from year 2002-2011 was the sample. The study found that there is no connection between capital structure and all measures of performance. This research will affirm Miller-Modigliani theory that certainly capital structure is relevant in determining the performance of a …show more content…

In this respect Singal (2013) has conducted research on credit rating and its impact on firm performance. In Accordance with his study credit rating is projected to measure a solvency of firm and it depends on previous and current and expected future performance of firm. The study further illustrate that credit rating is appropriate measure for performance assessment and consequently credit rating measure should directly related with anticipated performance measures. Firms with highly capital-intensive and leveraged use credit rating as measuring tool to assess the financial condition of their firms. Certainly, a study has shown that credit rating changes straight away influence the stock prices and bond prices in the expected direction Holthausen and Leftwich (1986). Therefore, they considered firm’s credit rating as important measure of performance of an

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