Skip to main content

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.

Comments

  1. this is really nice to read..informative post is very good to read..thanks a lot!
    Milton barbarosh

    ReplyDelete
  2. i read a lot of stuff and i found that the of writing clearifing that exactly want to say was very good so i am impressed and ilike to come again in future..

    Visit here

    ReplyDelete

Post a Comment

Popular posts from this blog

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge.   We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a majesti

Five Lessons from the Allegory of the Cave

  Please correct me if there are others. But it seems to be there are five lessons the reader is meant to draw from the story about the cave.   First, Plato  is working to devalue what we would call empiricism. He is saying that keeping track of the shadows on the cave wall, trying to make sense of what you see there, will NOT get you to wisdom. Second, Plato is contending that reality comes in levels. The shadows on the wall are illusions. The solid objects being passed around behind my back are more real than their shadows are. BUT … the world outside the the cave is more real than that — and the sun by which that world is illuminated is the top of the hierarchy. So there isn’t a binary choice of real/unreal. There are levels. Third, he equates realness with knowability.  I  only have opinions about the shadows. Could I turn around, I could have at least the glimmerings of knowledge. Could I get outside the cave, I would really Know. Fourth, the parable assigns a task to philosophers

Searle: The Chinese Room

John Searle has become the object of accusations of improper conduct. These accusations even have some people in the world of academic philosophy saying that instructors in that world should try to avoid teaching Searle's views. That is an odd contention, and has given rise to heated exchanges in certain corners of the blogosphere.  At Leiter Reports, I encountered a comment from someone describing himself as "grad student drop out." GSDO said: " This is a side question (and not at all an attempt to answer the question BL posed): How important is John Searle's work? Are people still working on speech act theory or is that just another dead end in the history of 20th century philosophy? My impression is that his reputation is somewhat inflated from all of his speaking engagements and NYRoB reviews. The Chinese room argument is a classic, but is there much more to his work than that?" I took it upon myself to answer that on LR. But here I'll tak