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This theory is often set up as a competitor theory to the pecking order theory of capital structure. [2] A review of the trade-off theory and its supporting evidence is provided by Ai, Frank, and Sanati. [3] An important purpose of the theory is to explain the fact that corporations usually are financed partly with debt and partly with equity.
The Williamson tradeoff model is a theoretical model in the economics of industrial organization which emphasizes the tradeoff associated with horizontal mergers between gains resulting from lower costs of production and the losses associated with higher prices due to greater degree of monopoly power.
In economics a trade-off is expressed in terms of the opportunity cost of a particular choice, which is the loss of the most preferred alternative given up. [2] A tradeoff, then, involves a sacrifice that must be made to obtain a certain product, service, or experience, rather than others that could be made or obtained using the same required resources.
An equity-efficiency tradeoff appears when there is some kind of conflict between maximizing the equity and maximizing economic efficiency. The trade-off between equity and efficiency is at the heart of many discussions of tax policy. Two questions are debated. First, there is disagreement about the nature of the trade-off .
However, there is no clear theoretical basis for the belief that removing a market distortion will always increase economic efficiency. The theory of the second best states that if there is some unavoidable market distortion in one sector, a move toward greater market perfection in another sector may actually decrease efficiency.
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning ...
Another theory related to the efficient market hypothesis created by Louis Bachelier is the "random walk" theory, which states that prices in the financial markets evolve randomly. Therefore, identifying trends or patterns of price changes in a market can't be used to predict the future value of financial instruments .
Warren Samuels described it as "a means of relating modern high theory to Adam Smith and, as such, an interesting example in the development of language." [ 32 ] Proponents of liberal economics, for example Deepak Lal , regularly claim that the invisible hand allows for market efficiency through its mechanism of acting as an indicator of what ...