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The Modigliani-Miller theorems: a cornerstone of finance

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  • Marco Pagano

    ()
    (Università degli Studi di Napoli Federico II, Dipartimento di Teoria e Storia dell'Economia Pubblica, Napoli (Italy))

Abstract

The Modigliani-Miller (MM) theorems are a cornerstone of finance for two reasons. The first is substantive and it stems from their nature of "irrelevance propositions": by providing a crystal-clear benchmark case where capital structure and dividend policy do not affect firm value, by implication these propositions help us understand when these decisions may affect the value of firms, and why. Indeed, the entire subsequent development of corporate finance can be described essentially as exploring the consequences of relaxing the MM assumptions. The second reason for the seminal importance of MM is methodological, by relying on an arbitrage argument, they set a precedent not only within the realm of corporate finance but also (and even more importantly) within that of asset pricing.

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Bibliographic Info

Article provided by Banca Nazionale del Lavoro in its journal BNL Quarterly Review.

Volume (Year): 58 (2005)
Issue (Month): 233-234 ()
Pages: 237-247

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Handle: RePEc:psl:bnlaqr:2005:213

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Keywords: Finance;

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  1. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  2. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, 06.
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  4. Barnett, William A. & Solow, Robert, 2000. "An Interview With Franco Modigliani," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 222-256, June.
  5. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  6. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
  7. Ross, Stephen A, 1988. "Comment on the Modigliani-Miller Propositions," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 127-33, Fall.
  8. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  9. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 1-32.
  10. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
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  12. Steven N. Kaplan & Per Stromberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," NBER Working Papers 7660, National Bureau of Economic Research, Inc.
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  14. Schmidt, Klaus M., 2003. "Convertible Securities and Venture Capital Finance," Munich Reprints in Economics 19769, University of Munich, Department of Economics.
  15. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 1-32, January.
  16. repec:cup:macdyn:v:4:y:2000:i:2:p:222-56 is not listed on IDEAS
  17. Modigliani, Franco, 1988. "MM--Past, Present, Future," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 149-58, Fall.
  18. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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