Merton Miller's illustrious academic career started at Harvard,
from which he graduated in 1943. He spent the next few years in
Washington, D.C., working at the US Treasury and the Federal Reserve.
He earned his Ph.D. from Johns Hopkins in 1952. The following
year, he joined Carnegie Tech, in Pittsburgh, where he taught
economic history. At Carnegie Tech, Merton Miller first encountered
another, somewhat older, economist, Franco Modigliani. Their subsequent
collaboration was destined to become part of economic history.
Modigliani won the Nobel Prize in Economic Sciences in 1985. In
turn, Merton Miller won his in 1990. The product of their collaboration,
which was quickly dubbed the "M&M theorem," is still widely
discussed and argued among economists and corporate finance types.
If you thought economists were dull, Merton Miller will change
your mind. He has a well-known sense of humor, and we'll put it
to the test. While the M&M theorem is not directly about investing
in stocks, it does have some very real application to valuing
a company. By the time we're finished, I think you'll agree that
everyone interested in the field should know something about it.
We ask about his views on market efficiency and investing generally,
and we get into areas few people have ever explored with Professor
Miller. Here we go.
Peter J. Tanous: How did you first get interested in stocks?
Merton Miller: Well, I don't know, because it was so long ago!
They are part of the atmosphere. I was in economics even as
an undergraduate. Stocks were part of the environment. How did
you get interested in stocks?
I was an economics major at Georgetown. In my first economics
class as a freshman, our professor, Dr. Gunther Ruff, asked
the students why they were taking the course. I said, because
I thought I might learn how to make money. He said, "My dear
fellow, I have a Ph.D. in economics, and if I knew how to make
money, I wouldn't be here."
When I started worrying about stocks, it was the late 1930s
and early 1940s and it didn't seem like a good way to make money
then, either. Stocks were in bad repute after 1929. A variety
of questions were being raised everywhere about the role of
the stock market crash in bringing on the depression. There
were also congressional hearings and investigations, not only
into the crash, but on the role of the corporation in American
economic life. The subject of stocks was very much in the news.
As an economics undergraduate, I also worked on a part-time
basis in Cambridge, Massachusetts, for a company that was advising
customers about portfolio decisions, writing reports. So I was
constantly exposed to stocks, if only by reading through Moody's
and transcribing numbers for the customer reports.
As far as personal investing was concerned, I was more concerned
with my savings account than with stocks.
I guess that was appropriate to the '30s.
Yes, it was. You could get an interest-paying savings account
in Harvard Square, providing there wasn't too much activity
in your account. I would get my monthly allowance and put it
in one of the local banks, making small withdrawals every day
to pay expenses. After awhile, I would get a notice from the
bank saying that there was too much activity in my account and
they were closing it out. So, I would walk my money across the
street to one of the other banks. There were four of them, one
on each corner. I just put the money in the next bank. That
way, I managed to have a checking account without paying transaction
fees. I didn't feel guilty, because I knew that the banks had
gotten the government to ban interest on checking accounts.
I was just doing to them what they were doing to me.
I see the beginning of an economic theory here. As you know,
Professor, our book focuses on interviews with great investment
managers, but I also wanted to get some top academic points-of-view
on markets. I thought it might be interesting to begin our conversation
by talking about your celebrated work with Franco Modigliani
in the area of corporate capital structure. I am referring,
of course, to your combined work, amusingly known at "the M&M
theorem." As I recall, instead of asking investors how they
might determine which of a corporation's securities they might
want to buy, you looked at it from the opposite perspective.
You asked, how should corporations decide what securities to
sell.
Yes. That was certainly part of it. Early on, I had to teach
a course on corporate finance. I had never had a course in finance,
or at least a business school variety course. My expertise was
in public finance, particularly corporate taxation, since I
had worked at the US Treasury. At first, I worked in the corporate
tax unit of the Division of Tax Research at Treasury, later
in the government finance unit at the Federal Reserve. So, I
knew the tax side of corporate finance, and the economics of
public finance, but not the standard finance stuff.
In 1954 or so, before they let me teach a business school finance
course, at Carnegie Tech [now Carnegie Mellon], they
said, you must sit in on the class of someone who is teaching
it the proper Harvard Business School way. So, I sat in the
class. When we took up case number one in the case book, I remember
being struck that the solution was not obvious to me. After
the instructor explained it, however, I said, Yeah. That's right;
that makes sense. Then we came to case t
