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He reviews the literature on capital requirements, then analyzes the Modigliani-Miller theorem whereby capital structure is irrelevant, discussing it within the context of US banks; the benefits and costs of higher bank capital and the optimal capital ratio; total loss-absorbing capacity requirements, in terms of the literature and new evidence on the losses of the largest US banks in the recession, to determine whether they had engaged in excessive risk taking as a result of too big to fail incentive distortions; the literature claiming that there is already too much finance, based on statistical correlations of growth with indicators of financial depth; and how the optimal capital ratio is about one-third larger than the target set in Basel III.
In corporate finance, the well-known Modigliani-Miller theorem of leverage irrelevance implies that the value of a firm does not depend on its leverage.
The Modigliani-Miller theorem and entrepreneurial firms: an overview.
Also, the Modigliani-Miller Theorem developed by Nobel prize-winning economists Franco Modigliani and Merton Miller "determined that payments of dividends has no impact on the value of a firm," says Cahn.
Notably, Slemrod (2000) recognized that the most empirically studied form of income shifting concerning corporate taxes involved assessments of issuing debt as a means to reduce the firm's taxable income, hence building upon the seminal Modigliani-Miller Theorem of capital structure.
Hellwing, Martin (1981), "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review 71(1): 155-170.
Coincidentally, around the same time others were suggesting that the Modigliani-Miller theorem was a special case of the Coase theorem (see, for example, Fama 1978).
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.
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.
During Charlie's academic years, three intertwined minimalist paradigms ascended to prominence in financial economics--the Modigliani-Miller Theorem and the twin hypotheses of rational expectations and financial market efficiency.
An Extension of the Modigliani-Miller Theorem to Stochastic Economies with Incomplete Markets and Interdependent Securities, Journal of Economic Theory, 45, 353-369.