Miller and Modigliani's irrelevance proposition

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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 Modigliani-Miller theorem (complete markets, no transaction costs, no taxes, no bankruptcy costs) is also questioned, because this context provides security holders with their own incentives for affecting firm management.
1974, "Default Risk, Homemade Leverage, and the Modigliani-Miller Theorem," American Economic Review, March, pp.
1969, "A Re-Examination of the Modigliani-Miller Theorem," American Economic Review, December, pp.
The famous Modigliani-Miller theorem, otherwise known as the capital structure irrelevance principle, demonstrates that the proportion of debt and equity capital a company uses to finance itself is immaterial the cost is the same--in the absence of policy distortions that affect the cost of each.
An Extension of the Modigliani-Miller Theorem to Stochastic Economies with Incomplete Markets and Interdependent Securities, Journal of Economic Theory, 45, 353-369.
Both channels derive from a failure of the Modigliani-Miller theorem for banks.
For output effects, other necessary conditions are that some borrowers cannot find perfect substitutes for bank loans (that is, the Modigliani-Miller theorem must fail for some nonfinancial firms as well as for banks) and the presence of some nominal rigidity.
1981, "Bankruptcy, Limited Liability and the Modigliani-Miller Theorem," American Economic Review 71, 155-170.
The first set illustrates the Modigliani-Miller Theorem.
This invariance of the value of the firm to its financing decision is an example of the Modigliani-Miller theorem (Modigliani and Miller 1958).
Miller often expounds jokingly the Modigliani-Miller theorem by saying "you may understand it if you know why this is a joke.
The second equality in (10) follows by (8) and provides a familiar corollary to the 1958 Modigliani-Miller theorem (Modigliani and Miller, 1958); for examples in the literature see MacMinn (1987).