The Quarterly Review of Economics and Finance 43 (2003) 239–260 Capital structure, investment unanimity, and public goods: the case for social responsibility Donald I. Bosshardt ∗ Canisius College, 2001 Main Street, Buffalo, NY 14208, USA Received 5 July 2001; received in revised form 19 August 2002; accepted 18 October 2002 Abstract This paper examines the concepts of optimal capital structure and investment in an economy where government’s role is the provision of a public good. That public good is financed through current tax revenues and the sale of government securities. Absent such complications, traditional finance theory has established the equivalence among (competitive) value maximization, unanimity, and Pareto optimality. In the setting of this paper, however, the market value of government securities is not determined by the value of public good production, and the correspondence between value maximization, Parto optimality, and unanimity will not generally hold without significant restrictions on the tax structure. Otherwise, value maximization is neither an optimal nor unanimously supported objective for the firm. © 2002 Board of Trustees of the University of Illinois. All rights reserved. JEL classification: G320, H200, H410 Keywords: Optimal capital structure; Taxation; Public goods; Value maximization 1. Introduction Not long after the seminal paper by Modigliani and Miller (1958) which demonstrated that in a perfect capital market, the capital structure decision of a firm was a matter of indiffer- ence to its investors, M&M published a correction (Modigliani & Miller, 1963), indicating that the corporate tax would impart value consequences to the choice of the corporate debt level. Since that time, the tax advantage of debt financing has occupied a central role among ∗ Tel.: +1-716-888-2676. E-mail address: bosshard@canisius.edu (D.I. Bosshardt). 1062-9769/02/$ – see front matter © 2002 Board of Trustees of the University of Illinois. All rights reserved. PII:S1062-9769(02)00189-8