Miller and Modigliani's irrelevance proposition

(redirected from Modigliani Miller Theorem)

Miller and Modigliani's irrelevance proposition

Theory that if financial markets are perfect, corporate financial policy (including hedging policy) is irrelevant.

Miller and Modigliani's Irrelevance Proposition

A theory stating that if financial markets are perfectly efficient, then how a company is a financed has no bearing on its performance. That is, without taxes, asymmetric information, or government and other unnecessary fees, then a company is equally likely to perform well regardless if it is financed by equity issues, debt, or something else. It also states that a company's dividend policy is irrelevant in these circumstances. This theory has been used to justify the increased use of leverage since the 1980s and critics contend that it has led to needless risk-taking.
References in periodicals archive ?
The capital structure of a company is referred to the way in which the company finances itself through debts, equity and securities; it can therefore be referred to as the capital composition of the company taking into consideration its liabilities, Modigliani and Miller propose the Modigliani Miller theorem of capital structure which states that the value of a company in a perfect market is unaffected by the way the company is financed but through the capital structure it employs.