Abstract
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.
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Villamil, A.P. (2018). Modigliani–Miller Theorem. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2455
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DOI: https://doi.org/10.1057/978-1-349-95189-5_2455
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