This paper examines the interplay between the real and financial decisions of the competitive firm under output price uncertainty. The firm faces additional sources of uncertainty that are aggregated into a background risk. We show that the firm always chooses its optimal debt-equity ratio to...

This paper critically surveys the key literature on corporate financing policy, capital structure and firm ownership in order to identify the leading theoretical and empirical issues in this area. The theoretical component of the survey attempts to reconcile competing theories of capital...