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The Modigliani-Miller model, also called the capital structure irrelevance principle is one of the most commonly used models for capital structure in modern days. The theorem states that, the value of a firm is not affected by the way it is financed or what the dividend policy of the company is. It does not matter if the firm is financed by raising funds through issuing equity or debt.

Assumptions underlying MM Model:

  • Classic Random walk theory holds good
  • There are no taxes,
  • There are no bankruptcy costs
  • There is no asymmetric information
  • The markets are efficient

 

Modigliani was awarded the 1985 Nobel Prize in Economics while Miller won the 1990 Nobel Prize in Economics, along with William Sharpe and Harry Markowitz, for their contribution to the theory of financial economics.

The theory has been used to promote and expand the use of leverage.

 

 

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