Common-sense intuition predicted debt-equity balance mattered via risk preferences and institutional pressures

Evidence

It therefore seemed plausible that there should be an optimum balance between the issuing of stocks and of bonds. One might expect that this optimum balance would depend on investors’ attitudes to risk and on matters such as the “psychological and institutional pressures” (Modigliani and Miller 1958, p. 279) on investors to hold investment portfolios of bonds rather than stocks. Those pressures were still strong in the 1950s. — Donald MacKenzie, An Engine, Not a Camera, 179

Categorization

• XREF: Bonds’ interwar reputation as safe, stocks as disasters’ victim resonates with the ‘Grafting & Growth’ piece’s infrastructure lens on inherited market reputations? More directly: links to behavioral-finance criticisms the book later addresses. — connects to: Corporate value is unaffected by debt-versus-equity financing mix in perfect markets — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 175