Miller and Modigliani's irrelevance proposition

(redirected from Modigliani-Miller theorem)
Also found in: Wikipedia.

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 ?

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.

The Right Balance for Banks: Theory and Evidence on Optimal Capital Requirements

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.

Risk management, governance, culture, and risk taking in banks

The Modigliani-Miller theorem and entrepreneurial firms: an overview.

On the separability of real and financial decisions

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.

Dividend-Paying Stocks May Be Riskier Than Many Think

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.

Debt and taxes: marginal tax rate changes, capital structure, and innovative activity in the biotechnology sector

Hellwing, Martin (1981), "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review 71(1): 155-170.

The economics of structured leasing

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 Coase Theorem down under: revisiting the economic record controversy

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.

The Theory of Corporate Finance

1974, "Default Risk, Homemade Leverage, and the Modigliani-Miller Theorem," American Economic Review, March, pp.

Leverage and asset allocation under capital market distortion

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.

Debt and systemic risk: the contribution of fiscal and monetary policy

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.

Charles Kindleberger: an impressionist in a minimalist world

An Extension of the Modigliani-Miller Theorem to Stochastic Economies with Incomplete Markets and Interdependent Securities, Journal of Economic Theory, 45, 353-369.