On the irrelevance of financial policy under market incompleteness and trading constraints

- We study the Modigliani-Miller Theorem with incomplete markets and trading limits.
- There exist state-dependent limits under which financial policy is irrelevant.
- A no short-selling limit on equity is innocuous in spite of being state-independent.

We study the Modigliani and Miller Theorem under portfolio constraints. We show that there exist state-dependent trading limits under which financial policy is irrelevant. In addition, a no short-selling constraint on equity is innocuous in spite of being state-independent.