Modigliani-Miller theorem

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Updated: Aug 20, 2021

The theory that in a perfect capital market the value of a firm is independent of the method of financing used. Capital can he raised by borrowing, issuing equity shares, or retaining profits instead of paying dividends. The Modigliani-Miller theorem asserts that in a perfect capital market it does not matter to a firm whether it uses debt or equity, or what dividend policy it follows. The fact that firms do worry about their leverage and dividend policies reflects the effects of the tax system and imperfection in the capital market.

Reference: Oxford Press Dictonary of Economics, 5th edt.



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James Knight
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James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.