Merton Miller

The Modigliani-Miller Theorems

Merton Miller

Franco Modilgiani - Nobel Prize in Economics 1985

Merton Miller - Nobel Prize in Economic Sciences, 1990

Franco Modigliani

Merton Miller

The Modigliani-Miller Theorems concern decisions about aspects of the accumulated savings stock. The basic model was formulated in Modigliani's and Miller's essay, "The Cost of Capital, Corporation Finance" and "The Theory of Investment" (1958). Two other important essays followed in 1963 and 1966. Using this basic model, Miller and Modigliani derived two so-called invariance theorems, now known as the MM theorems. As Peter Bernstein asserts, "You have only to mention these letters to finance people, and they know what you mean."

The Model of Portfolio Choice and the Capital Asset Pricing Model focus on financial investors, while Merton Miller, initially in collaboration with Franco Modigliani, established a theory for the capital market relationship between the capital asset structure and dividend policy of production firms and firms' market value and costs of capital.

The main message of the MM theorems is as follows: a firm’s value is unrelated to its dividend policy, and policy is an unreliable guide for stock selection. The MM theorems have become the comparative norm for theoretical and empirical analyses in corporate finance. Merton Miller, who died in 2001, is the researcher who has dominated these analyses during the last two decades. He has made a unique contribution to modern theory of corporate finance. Also see Debunking Dividend Myths: Part 1 and Part 2.