Arguments for costs of capital requirements in the long run are based on trade-off theories of capital structure. This paper provides a critical assessment of these theories by studying how the optimal capital structure can be modified, when a firm uses the financial markets to alter its cash flow distribution. I show that, for any initial set of assets, the implementation of a certain fund structure allows the firm to reduce its leverage and its bankruptcy probability without a loss of value.
G32 - Financing Policy; Capital and Ownership Structure ; G30 - Corporate Finance and Governance. General ; G28 - Government Policy and Regulation ; G10 - General Financial Markets. General