The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Modigliani–Miller Theorem

  • Anne P. Villamil
Reference work entry


The Modigliani–Miller theorem provides conditions under which a firm’s financial decisions do not affect its value. The theorem is one of the first formal uses of a no arbitrage argument and it focused the debate about firm capital structure around the theorem’s assumptions, which set the conditions for effective arbitrage. The search for the source of the ‘failure of irrelevance’ has led to important advances in the nature of financial structure, and more fundamentally to the types of frictions that would cause agents to have different market opportunities, information sets or commitment frictions.


Agency problems Arbitrage Bankruptcy Capital gains Control rights Debt versus equity Debt–equity ratio Dividend policy Finance Imperfect information Incomplete contacts Information revelation Insider trading Law of one price Leasing vs. buying Miller, M. Modigliani, F. Modigliani–Miller theorem Monitoring Optimal capital structure Optimal contracts Separating equilibrium Separation of ownership and control Shareholder voting rights Signalling models of equity Taxation of capital income Verification costs 

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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Anne P. Villamil
    • 1
  1. 1.