Critics of the Modigliani-Miller theory argue which of the following are reasons why capital structure matters? I. taxes
II. subsidies
III. adverse selection

Question

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Critics of the Modigliani-Miller theory argue that capital structure matters because of the impact of taxes, as interest payments on debt are tax-deductible which lowers the overall cost of capital. They also argue that adverse selection may occur, where investors may perceive a high level of debt as a signal of high risk, which can affect the firm's ability to raise capital. However, subsidies are not typically cited as a reason why capital structure matters.

Critics of the Modigliani-Miller Theory Argue Which of the Following