The Modigliani-Miller Theorems
UP TO THE MIDDLE of the 1950s, the literature of corporate finance consisted mainly of descriptions of methods and institutions.1 Theoretical analysis was rare. It was not until Franco Modigliani and Merton Miller, in 1958, presented their now-famous theorem, and at about the same time James Tobin (Nobel Prize 1981) and others started to develop the theory of portfolio selection, that a scientific theory emerged concerning the connection between financial market characteristics and the financing of investments, debts, taxes, etc. Once established, this theory developed very rapidly.
The first Modigliani-Miller theorem concerns the question of how the market value of a firm is affected by the volume and ...

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