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Journal oJEconomicPasprdirxs-
2
4
Fall 1988
Pages 99-120
The Modigliani-Miller Propositions After Thirty Years
Merton H Miller
This issue of the Journal of Economic Perspectives appears on the 30th anniversary of the Modigliani-Miller propositions in "The Cost of Capital, Corporation Finance and the Theory of Investment," published in the American Economic
Review, June 1958. The editors have invited me, if not to celebrate, at least to mark the event with a retrospective look at what we set out to do on that occasion and an appraisal of where the propositions stand today after three decades of intense scrutiny and often bitter controversy.
Some of these controversies can be now be regarded as settled. Our Proposition I, holding the value of a firm to be independent of :'s capital swcture (that is, its debt/eqtuty ratio) is accepted as an implication of eqttilibritun in perfect capital markets. The validity of our then-novel arbitrage proof of that proposition is also no longer disputed, and essentially similar arbitrage proofs are now common throughout finance.t Propositions analogous to, and often even called, M and M propositions, have spread beyond corporation finance to the fields of money and banking, fiscal policy and international finance.z
tExamples include Comell and French (19R3) on the pricing of stock index futures, Black and Scholes (1973) on the pricing of options and Rags (1976) on the structure of capital asset priar generally. For other, and in some rnpeets, more general proofs of our capital structure proposition, see among others, Stiglitz (1974) for a general equilibrium proof showing that individual wealth and consumption opportunities are unaffected by capital structure; Hitshleifer (1965) and (1966) for a state preference, complete-markets proof; Duffle and Shafer (1986) (or extensions to some cases of incomplete markets and Merton (forthcoming) for a spanning proof.
ZSee, for example, Wallace (1981) on domestic open-market operations; Satgent and Smith (19B6) on central bank foreign-acchange intervention; Chamley and Polemarchakis (1984) on government tax and borrowing policin; and Fama (1980, 1983) on money, banking and the quantity theory.
Merton H. Miller is Robert R. McCormick Dutinguuhed Service PsoJasor, Graduate School of Bttrmtss, Uniacrsity of Chicago, Chicago, Illinois.
Clearly Proposition I, and its proof, have been accepted into economic theory. Lass clear, however, is the empirical significance of...