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Corporate Finance

Image result for franco modigliani and merton miller

I remember taking a Corporate Finance course in law school.

I retained a few things therefrom, for example, a sense of the sharp legal distinction between the rights of debtors on the one hand and the rights of owners of equity on the other. There was some material too about friendly versus unfriendly takeovers, and the ways in which the latter might be resisted by the target company's board.

But what I remember most vividly about the course was a discussion of the Miller-Modigliani theorem. This is the hypothesis proposed by the two named economists, Merton H. Miller and Franco Modigliani, that a rational corporate management will be indifferent as to whether it raises money by issuing debt or by issuing new stock. The debt/equity distinction, as important as it was in law, was trivial in economics. Or so the economists said.

[Investopedia contains a fine article explaining the basics.]  I was very struck by this M/M theorem, and not just because I've enjoyed the candy with a similar name. I enjoyed what seemed the elegance of the two scholars' argument in its favor. At this time, in the early '80s, I wasn't alone.

The M/M theorem still lives in the background literature about financial economics, though these days it is as a background assumption, more often honored in the discussion of exceptions than in consideration of indifference as a rule.

That is the extent of my nostalgic musing for the day.

Oh, and that's Franco Modigliani portrayed above.


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