The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Modigliani–Miller Theorem

  • Anne P. Villamil
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2455

Abstract

The Modigliani–Miller theorem provides conditions under which a firm’s financial decisions do not affect its value. The theorem is one of the first formal uses of a no arbitrage argument and it focused the debate about firm capital structure around the theorem’s assumptions, which set the conditions for effective arbitrage. The search for the source of the ‘failure of irrelevance’ has led to important advances in the nature of financial structure, and more fundamentally to the types of frictions that would cause agents to have different market opportunities, information sets or commitment frictions.

Keywords

Agency problems Arbitrage Bankruptcy Capital gains Control rights Debt versus equity Debt–equity ratio Dividend policy Finance Imperfect information Incomplete contacts Information revelation Insider trading Law of one price Leasing vs. buying Miller, M. Modigliani, F. Modigliani–Miller theorem Monitoring Optimal capital structure Optimal contracts Separating equilibrium Separation of ownership and control Shareholder voting rights Signalling models of equity Taxation of capital income Verification costs 

JEL Classifications

G3 
This is a preview of subscription content, log in to check access.

Bibliography

  1. Aghion, P., and P. Bolton. 1992. An incomplete contracts approach to financial contracting. Review of Economic Studies 59: 473–494.CrossRefGoogle Scholar
  2. Alchian, A., and H. Demsetz. 1972. Production, information costs and economic organization. American Economic Review 62: 777–795.Google Scholar
  3. Allen, F., A. Bernardo, and I. Welch. 2000. A theory of dividends based on tax clienteles. Journal of Finance 55: 2499–2536.CrossRefGoogle Scholar
  4. Allen, F., and D. Gale. 1988. Optimal security design. Review of Financial Studies 1: 229–263.CrossRefGoogle Scholar
  5. Allen, F., and D. Gale. 1991. Arbitrage, short sales and financial innovation. Econometrica 59: 1041–1068.CrossRefGoogle Scholar
  6. Bhattacharya, S. 1979. Imperfect information, dividend policy, and the ‘bird in the hand’ fallacy. Bell Journal of Economics 10: 259–270.CrossRefGoogle Scholar
  7. Bulow, J. 1986. An economic theory of planned obsolescence. Quarterly Journal of Economics 101: 729–749.CrossRefGoogle Scholar
  8. Coase, R. 1972. Durability and monopoly. Journal of Law and Economics 15: 142–149.Google Scholar
  9. Eisfeldt, A., and A. Rampini. 2007. Leasing, ability to repossess and debt capacity. Review of Financial Studies, forthcoming.Google Scholar
  10. Grossman, S., and O. Hart. 1988. One share one vote and the market for corporate control. Journal of Financial Economics 20: 175–202.CrossRefGoogle Scholar
  11. Harris, M., and A. Raviv. 1988. Corporate governance: Voting rights and majority rule. Journal of Financial Economics 20: 203–235.CrossRefGoogle Scholar
  12. Hendel, I., and A. Lizzari. 1999. Interfering with secondary markets. RAND Journal of Economics 30: 1–21.CrossRefGoogle Scholar
  13. Hendel, I., and A. Lizzari. 2002. The role of leasing under adverse selection. Journal of Political Economy 110: 113–143.CrossRefGoogle Scholar
  14. Krasa, S., and A.P. Villamil. 2000. Optimal contracts when enforcement is a decision variable. Econometrica 68: 119–134.CrossRefGoogle Scholar
  15. Lacker, J., and J. Weinberg. 1989. Optimal contracts under costly state falsification. Journal of Political Economy 97: 1345–1363.CrossRefGoogle Scholar
  16. Leland, H., and D. Pyle. 1977. Informational asymmetries, financial structure and financial intermediation. Journal of Finance 32: 371–387.CrossRefGoogle Scholar
  17. Miller, M.H. 1977. Debt and taxes. Journal of Finance 32: 261–275.Google Scholar
  18. Miller, M.H. 1988. The Modigliani–Miller proposition after thirty years. Journal of Economic Perspectives 2(4): 99–120.CrossRefGoogle Scholar
  19. Miller, M.H. 1991. Financial innovations and market volatility. Cambridge, MA: Blackwell.Google Scholar
  20. Miller, M.H., and F. Modigliani. 1961. Dividend policy, growth and the valuation of shares. Journal of Business 34: 411–433.CrossRefGoogle Scholar
  21. Miller, M.H., and C. Upton. 1976. Leasing, buying and the cost of capital services. Journal of Finance 31: 761–786.CrossRefGoogle Scholar
  22. Modigliani, F. 1980. Introduction. In The collected papers of Franco Modigliani, ed. A. Abel, Vol. 3. Cambridge, MA: MIT Press.Google Scholar
  23. Modigliani, F., and M.H. Miller. 1958. The cost of capital, corporate finance and the theory of investment. American Economic Review 48: 261–297.Google Scholar
  24. Modigliani, F., and M.H. Miller. 1963. Corporate income taxes and the cost of capital: A correction. American Economic Review 53: 433–443.Google Scholar
  25. Myers, S., D. Dill, and A. Bautista. 1976. Valuation of financial lease contracts. Journal of Finance 31: 799–819.CrossRefGoogle Scholar
  26. Myers, S., and N. Majluf. 1984. Corporate financing and investment when firms have information that investors do not have. Journal of Financial Economics 11: 187–221.CrossRefGoogle Scholar
  27. Stiglitz, J. 1969. A re-examination of the Modigliani–Miller theorem. American Economic Review 59: 784–793.Google Scholar
  28. Townsend, R. 1979. Optimal contracts and competitive markets with costly state verification. Journal of Economic Theory 22: 265–293.CrossRefGoogle Scholar
  29. Zender, J. 1991. Optimal financial instruments. Journal of Finance 46: 1645–1663.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Anne P. Villamil
    • 1
  1. 1.