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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. Want to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit the webmaster's page for free fun content. |
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No references found | Miller often expounds jokingly the Modigliani-Miller theorem by saying "you may understand it if you know why this is a joke. 1981, "Bankruptcy, Limited Liability and the Modigliani-Miller Theorem," American Economic Review 71, 155-170. A few eponyms which spring to mind are: Hicks-neutral technical progress, the Arrow impossibility theorem, the Leontief-production function, K-spaces (named after Kantorovich), the Stolper-Samuelson theorem, the Heckscher-Ohlin theorem, Tobit-estimation, the Stone age of consumption analysis (because of the simple linear form of the expenditure consumption model), the Modigliani-Miller theorem, the Solow residual, the Allais paradox, the Coase theorem, Nash-equilibrium, and the Lucas critique. |
Modigliani-Miller theorem |
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